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II 


OPPOSING  GOVERNMENT  OWNER- 
SHIP AND  OPERATION  OF  PUBLIC 
UTILITIES. 

ADVOCATING  EXCLUSIVE  REGULA- 
TION OF  ALL  RAILROADS  BY  THE 
FEDERAL  GOVERNMENT. 


November,  1916 


*  Aaanriattott 
of 


I:  OPPOSING  GOVERNMENT  OWNER- 
SHIP AND  OPERATION  OF  PUBLIC 
UTILITIES. 

II :  ADVOCATING  EXCLUSIVE  REGULA- 
TION OF  ALL  RAILROADS  BY  THE 
FEDERAL  GOVERNMENT. 


November,  1916 


THE  Merchants'  Association  of  New  York,  on  the  recom- 
mendation of  its  Committee  on  Transportation,  has 
adopted  the  following  preambles  and  resolutions ; 

I :  Opposing  government  ownership  and   operation  of  pub- 
lic utilities ; 

II :  Advocating  the  exclusive  regulation  of  all  railroads  by 
the  Federal  Government; 

has  approved  the  appended  arguments  prepared  under  the  di- 
rection of  the  Committee;  and  directed  that  the  Association, 
through  its  representatives,  appear  before  the  Newlands  Com- 
mission in  support  thereof. 

New  York,  November  15,  1916. 

S.  C.  MEAD, 
Secretary. 


I:  RESOLUTIONS. 


I:-OPPOSING  GOVERNMENT  OWNERSHIP  AND 
OPERATION  OF  PUBLIC  UTILITIES* 

Whereas,  The  Newlands  Commission,  created  by  Senate  Joint 
Resolution  No.  60,  is  about  to  investigate,  among  other 
things,  "the  comparative  worth  and  efficiency  of  govern- 
mental regulation  and  control  [of  public  utilities]  as  com- 
pared with  governmental  ownership  and  operation"  and 

W here as,  The  fundamental  principles  of  our  form  of  govern- 
ment require; 

That  the  members  of  legislative  bodies  and  all  prin- 
cipal executive  officials  be  periodically  subject  to 
change ; 

That  the  number  of  members  of  legislative  bodies  be 
large  and  that  representation  be  sectional ; 

That  legislative  bodies,  by  means  of  laws  passed  by 
them,  direct  and  control  in  minute  detail  the  acts  of 
executive  officials ; 

That  the  discretionary  power  of  such  officials  be 
restricted  to  the  narrowest  possible  limits; 

That  no  outlays  of  public  monies  be  made  except  as 
expressly  authorized  by  law;  and 

Whereas,  By  reason  of  these  conditions  inseparable  from  our 
form  of  government,  governmental  operation  of  eco- 


349145 


nomic  undertakings,  whether  Federal,  State  or  Municipal, 
is  characterized  by: 

Extreme  delay  and  inertia,  vacillation,  hesitancy 
and  inconsistency  in  matters  of  policy; 

Wasteful  outlays  in  response  to  sectional  demands; 

Insufficient  provision  of  funds  when  needed  for  nec- 
essary purposes ; 

Absence  of  close  and  harmonious  co-operation  be- 
tween the  legislative  directorate  and  the  executive  offi- 
cials; 

Insecurity  of  tenure  in  the  higher  places  and  lack 
of  self-interest  as  an  incentive; 

Frequent  change  of  higher  officials  and  the  injection 
into  office  of  new  and  untried  men; 

Unsuitable  methods  of  selecting  executive  officials 
whereby  such  officials  are  often  not  properly  qualified 
by  expert  knowledge,  previous  training,  experience  or 
proved  capacity ; 

Hampering  conditions  imposed  by  law  upon  execu- 
tives whereby  they  are  deprived  of  necessary  control 
of  operation  and  of  their  subordinates;  and 

Whereas,  From  these  conditions  naturally  result  imperfect 
co-ordination,  lack  of  qualified  management,  bad  operat- 
ing methods,  and  general  waste  and  inefficiency;  both 
the  methods  and  the  results  being  diametrically  opposite 
to  those  which  prevail  in  properly  managed  business  un- 
dertakings, which  latter  are  governed  solely  by  economic 
considerations,  and  require  for  their  success  close  and 
friendly  relations  between  the  directorate  and  the  offi- 
cials; the  prompt  provision  of  funds  as  required  by  the 
economic  needs  of  the  business;  high  capacity,  long  ex- 


perience  and  special  training  on  the  part  of  the  executive 
officials,  assured  tenure  during  efficiency,  self-interest,  and 
the  possession  by  such  officials  of  a  very  large  degree 
of  discretion  as  to  outlays  and  operating  details;  Now, 
therefore,  be  it 

Resolved,  By  The  Merchants'  Association  of  New  York  that 
governmental  methods  in  the  conduct  of  business  affairs 
are  inherently  defective  by  reason  of  the  fundamental 
restrictions  imposed  by  our  form  of  government;  and 
that  governmental  methods  are  often  inefficient  and  waste- 
ful and  therefore  unsuited  to  the  conduct  of  business 
undertakings ;  And  be  it  further 

Resolved,  That  The  Merchants*  Association  of  New  York  is 
opposed  to  government  ownership  and  operation  of  rail- 
roads, telephones,  telegraphs,  and  other  public  utilities, 
believing  that  such  utilities  are  far  more  effectively  oper- 
ated under  private  ownership,  subject  to  public  regula- 
tion, than  would  be  possible  under  governmental  own- 
ership and  operation,  and  that  it  would  be  a  national 
calamity  to  subject  these  instruments,  indispensable  to  the 
welfare  of  the  whole  country  to  the  hampering,  inefficient 
and  wasteful  methods  inseparable  from  governmental 
undertakings. 


II:-ADVOCATING  THE  EXCLUSIVE  REGULATION  OF 
ALL  RAILROADS  BY  THE  FEDERAL  GOVERN- 
MENT. 

Whereas,  It  is  vital  to  the  welfare  of  the  whole  country  that 
the  entire  system  of  railroads  of  the  nation  be  maintained 


upon  a  !evel  of  the  highest  efficiency,  to  which  end  regu- 
lation by  public  authority  is  necessary ;  and 

Whereas,  The  railroads  of  the  country  are  now  subject  to 
regulation  by  the  Federal  government  and  by  each  of 
the  forty-eight  states,  which  multiple  control  by  inde- 
pendent authorities  results  in  a  large  body  of  unrelated, 
unco-ordinated  and,  often  conflicting  legislation;  in  the 
enactment  by  some  states  of  regulatory  laws  which  in- 
terfere with  the  rights  or  laws  of  other  states ;  in  require- 
ments as  to  equipment,  methods  and  conditions  of  opera- 
tion, differing  in  the  several  states,  with  which  compliance 
is  difficult  and  sometimes  impossible;  in  the  fixing  by 
different  states  of  different  rates  of  charge  for  a  similar 
or  identical  service ;  in  great  increase  in  the  cost  of  opera- 
tion and  in  making  difficult  the  conduct  of  a  railroad 
operating  in  two  or  more  states ;  and 

Whereas,  Nineteen  different  states  now  prescribe  the  condi- 
tions under  which  securities  may  be  issued  by  railroads 
operating  within  their  borders,  nearly  every  railroad 
thereby  being  subject,  in  the  matter  of  issuance  of  securi- 
ties, to  the  requirements  of  two  or  more  states,  each  hav- 
ing power  to  refuse  its  assent  and  thereby  to  prevent  the 
issuance  of  such  securities,  and  to  require  the  expenditure 
within  its  own  borders  of  part  of  the  proceeds  of  such 
securities,  irrespective  of  the  place  v/here  the  expenditure 
is  properly  required ;  and 

Whereas,  The  effect  of  this  multiple  regulation  has  greatly 
and  wastefully  increased  the  outlays  of  the  railroads  with- 
out increasing  their  earning  power,  and  has  curtailed 
their  revenues  by  direct  reduction  of  rates;  and 

6 


Whereas,  By  reason  of  these  causes  among  others,  the  credit 
of  the  railroads  has  been  gravely  impaired  within  recent 
years,  through  the  insufficiency  of  earnings  and  the  un- 
willingness of  the  public  to  invest  its  capital  subject 
to  hostile  attacks  by  numerous  legislative  bodies,  so  that 
there  exists  a  condition  under  which  new  issues  of  rail- 
road stocks  offer  little  attraction  to  permanent  investors, 
the  sole  source  of  additional  financial  support  available  to 
railroads  being  the  issuance  of  bonds  secured  by  mort- 
gages upon  the  property,  which  resource  is  rapidly  be- 
coming unavailable  by  reason  of  the  existence  of  prior 
liens;  Now,  therefore,  Be  it 

Resolved,  By  the  Merchants'  Association  of  New  York  that 
the  welfare  of  the  nation  requires  that  the  railroads  of  the 
country  be  maintained  on  the  highest  practicable  plane 
of  efficiency;  that  multiple  control  by  diverse  state  au- 
thorities, as  well  as  by  Federal  authority,  has  become 
undesirable  and  harmful,  that  while  the  public  interest 
requires  that  all  the  railroads  of  the  country  shall  be 
effectively  regulated  in  the  public  interest,  such  regula- 
tion can  best  be  effected  by  the  sole  authority  of  the  Fed- 
eral government,  thereby  insuring  consistency  and  uni- 
formity of  regulation,  and  consideration  of  the  economic 
necessity  of  so  protecting  the  revenues  of  the  railroads 
as  to  enable  them  to  attain  anil  maintain  the  efficiency  de- 
manded in  the  public  service; 

Resolved,  That  if  Congress  already  possesses  the  necessary 
Constitutional  power  to  effect  such  sole  regulation  by 
Federal  authority,  it  is  urged  that  Congress  fully  assert 
and  exercise  that  power  forthwith;  or,  if  the  present 


powers  of  Congress  appear  insufficient  for  that  purpose, 
that  the  necessary  powers  should  be  provided  by  amend- 
ment of  the  Constitution. 

Resolved,  That  such  regulation  should  include  sole  control  by 
the  Federal  government  of  the  conditions  under  which 
railroad  securities  may  be  issued,  and  that  as  means  to 
that  end,  Federal  incorporation  of  railroads  be  provided 
for; 

Resolved,  That  the  Interstate  Commerce  Commission  should 
be  so  enlarged  and  its  procedure  so  arranged  as  to  enable 
it  effectively  and  promptly  to  despatch  the  business  im- 
posed upon  it. 


8 


II:  CONDITIONS  WHICH  PRECLUDE  EFFI- 
CIENCY AND  ECONOMY  IN  GOV- 
ERNMENTAL OPERATION  OF 
PUBLIC  UTILITIES. 


I:-THE  FUNDAMENTALS  OF  ECONOMIC  EFFICIENCY. 

i : — The  fundamental  assumption  which  underlies  the  argu- 
ment for  Governmental  ownership  and  operation  of  public 
utilities  is  that  a  profit  equal  to  that  now  secured  by  private 
corporations  through  private  operation  can  be  secured  for  the 
public  benefit  by  public  operation;  or  that,  as  an  alternative, 
by  the  elimination  of  profit,  service  may  be  increased  or 
charges  reduced. 

2 : — This  implies  that  public  management  will  be  as  econ- 
omically efficient  and  productive  as  private  or  corporate  man- 
agement. The  latter  assumption  is  unwarranted.  On  the 
contrary,  it  can  be  shown  that  Governmental  management  is 
fundamentally  defective  in  important  particulars;  that  its  de- 
fects are  inherent  in  and  inseparable  from  our  system  of  Gov- 
ernment; and  that  those  defects  make, relative  inefficiency  and 
uneconomy  inevitable. 

3 : — The  Governmental  methods  adapted  to  and  in  many 
respects  admirable  for  the  primary  purposes  of  Government; 
namely,  the  protection  of  life,  property  and  civil  rights,  are 
unadapted  to  the  successful  management  of  industrial  under- 
takings, in  which  economic,  as  distinguished  from  political, 
principles  must  be  regarded. 

9 


Fundamental  principles  of  our  system  of  government  are 
that  the  personnel  of  the  legislative  and  the  higher  officials 
of  the  executive  branches  be  subject  to  periodical  change ;  that 
executive  discretion  be  closely  limited  by  law ;  and  that  no  out- 
lays of  public  monies  be  made  except  expressly  authorized  by 
law.  We  have  here  the  assurance  of  frequent  changes  in 
both  directive  and  administrative  control;  the  practical  cer- 
tainty of  frequent  and  perhaps  radical  changes  of  policy;  the 
impairment  of  executive  efficiency;  and  the  delay  or  with- 
holding of  necessary  funds.  These  conditions  which  are  of 
political  origin  and  are  inescapable  make  economic  efficiency 
impossible. 

4: — Economic  efficiency  requires  the  incentive  of  self-in- 
terest, not  only  on  the  part  of  the  owners  of  a  business  enter- 
prise, but  also  on  the  part  of  all  employees ;  a  definite,  care- 
fully planned,  and  consistent  policy;  a  perfectly  co-ordinated 
plan  of  operation;  prompt  provision  of  funds  needed  for  plant 
betterments  and  extensions;  constant  and  intimate  touch  be- 
tween directorate  and  executive;  infrequent  change  of  execu- 
tive officials,  tenure  during  efficiency,  and  practically  unre- 
stricted executive  authority  over  operation.  All  these  requi- 
sites are  present  in  well-managed  industrial  corporations; 
most  of  them  are  usually,  and  some  of  them  are  always,  lack- 
ing in  public  undertakings. 

5 : — The  fundamental  defects  of  Governmental  operation, 
nearly  always  present,  are : 

(a)   Dilatory,    inconsistent,    vacillating    and    therefore 
ineffective  and  wasteful  policy. 

(&)   Unsuitable,  inefficient  and  frequently  changed  execu- 
tive organization. 

(c)   Hampering  limitations  upon  executives. 

10 


(d)  Lack  of  self-interest  as  an  incentive. 

(e)  Lack  of  standards  of  efficiency. 

6 : — In  all  business  operations,  the  following  conditions  are 
requisite  to  economic  efficiency : 

THE  DIRECTORATE  : 

The  essentials  of  an  efficient  directorate  are : 

General  business  capacity  and  experience;  special 
knowledge  of  the  particular  business;  financial  interest; 

Intimate  and  continuous  contact  with  the  affairs  under 
their  direction; 

Close,  constant  and  harmonious  relations  between  the 
directorate  and  the  executive ; 

Prompt  action  upon  the  executive's  recommendations 
and  upon  all  questions  of  policy  whenever  they  arise. 

THE  EXECUTIVE: 

The  essentials  of  an  efficient  executive  are: 

Comprehensive  experience,  and  thorough  special  train- 
ing; exceptional  organizing  and  executive  ability;  and 
intimate  knowledge  of  detail; 

.Full  accord  with  the  directorate  as  to  policy  and  a  con- 
siderable degree  of  influence  in  determining  policy; 

Practically  complete  control  over  organization,  person- 
nel, operating  methods,  and  all  details.  Full  enlistment 
of  self-interest  as  an  incentive. 

7: — Practically  every  important  business  corporation  hav- 
ing to  do  with  physical  operations  conforms  to  these  require- 
ments. 

II 


The  members  of  the  Board  of  Directors  of  such  a  corpora- 
tion are  usually  chosen  because  of  their  general  business  ex- 
perience, sagacity  and  sound  judgment;  their  intimate  knowl- 
edge of  the  business  undertaken;  and  their  personal  financial 
interest  in  its  profitable  management. 

8: — In  the  management  of  economic  affairs,  important 
questions  of  policy  are  constantly  arising.  Unless  promptly 
and  wisely  disposed  of,  the  business  is  embarrassed,  hampering 
and  wasteful  conditions  arise  or  continue,  and  the  business 
becomes  unprofitable.  Hence,  capable  business  boards  meet 
at  short  intervals,  promptly  consider  and  dispose  of  the  ques- 
tions of  policy  submitted  by  the  management,  vote  the  funds 
needed  to  secure  or  maintain  economic  efficiency,  and  in  gen- 
eral make  the  authorizations  which  the  executive  demonstrates 
are  necessary  to  the  welfare  of  the  business. 

9: — A  business  board  will  select  an  executive  of  proved 
ability,  a  man  in  whose  sound  judgment  they  have  confidence, 
will  give  him  prompt  and  ample  support,  a'llow  him  wide  dis- 
cretion as  to  methods  and  means,  and  hold  him  to  full  respon- 
sibility for  results.  Thus  the  executive  is  enabled  promptly 
to  do  what  needs  to  be  done  to  make  the  business  economically 
successful.  His  full  ability,  zeal  and  energy  are  enlisted  to 
promote  efficiency,  prevent  waste  and  earn  profits. 

10 : — Contrary  conditions  govern  the  direction  and  manage- 
ment of  all  Governmental  undertakings.  The  Federal  Govern- 
ment may  be  used  for  purposes  of  illustration. 


II:— DEFECTS  OF  CONGRESS  AS  A  DIRECTORATE. 

1 1 : — It  is  axiomatic  in  business  affairs  that  large  direc- 
torates are  not  adapted  to  the  prompt  despatch  of  business, 

12 


to  judicious  outlay  or  to  economy  of  operation.  Congress, 
which  has  531  members  is,  in  effect,  the  Board  of  Directors 
of  whatever  business  enterprise  the  Government  undertakes. 
It  determines  by  law  what  shall  be  done;  it  prescribes  by  law, 
often  in  minute  detail,  the  manner  in  which  it  shall  be  done; 
it  jealously  restricts  the  power  of  the  executive;  it  gives  or 
withholds  funds  and  dictates  minutely  the  manner  in  which 
they  shall  be  applied,  thereby  controlling  in  detail,  the  methods 
and  the  operations  of  the  executive  branch. 

INERTIA  AND  ITS  EVIL  RESULTS. 

12: — A  Board  of  Directors  comprising  531  members  is 
inevitably  extremely  slow  in  its  operation.  Every  question 
involves  great  divergence  of  views  and  a  wide  range  of  con- 
flicting interests.  Political  expediency,  partisan  and  sectional 
demands,  conflicting  economic  theories,  personal  motives, 
selfish  influences,  and  popular  clamor  are  inseparable  factors. 
From  the  play  of  these  opposing  forces  results  prolonged 
inertia,  frequently  protracted  for  years ;  and  strictly  economic 
questions,  when  finally  decided,  are  seldom  decided  solely 
upon  economic  considerations.  Practically  every  decision  is 
a  compromise,  which  frequently  discards  some  essentials  and 
includes  mischievous  riders  and  often  paralyzing  restrictions. 

While  such  delay  may  not  be  serious  in  political  matters, 
it  is  deadly  to  economic  enterprises  in  which  prompt  deter- 
mination of  policy  is  frequently  vital,  and  always  requisite 
to  efficiency  and  economy  of  management. 

EMBARRASSMENT  OF  EXECUTIVE  ARISING  FROM  INERTIA  OF 
DIRECTORATE : 

13: — No  executive,  however  able  and  zealous,  can  admin- 
ister any  business  economically  or  with  reasonable  efficiency, 

13 


when  authorizations,  without  which  immediately  necessary 
operations  cannot  be  undertaken,  are  delayed  for  months  or 
years.  Executive  recommendations  of  a  nature  requiring 
prompt  action  are  by  Congress  commonly  delayed  indefinitely, 
frequently  refused  or  ignored.  In  consequence  an  important 
function  is  badly  and  wastefully  performed,  an  inefficient 
organization  continued  at  excessive  cost,  or  a  pressingly 
needed  and  partially  completed  public  work  delayed,  with 
material  increase  in  cost  as  a  result. 

WASTE  CAUSED  BY  DELAYED  APPROPRIATIONS. 

14 : — The  failure  or  refusal  of  Congress  to  grant  appropri- 
ations for  construction  as  required  for  the  most  economical 
prosecution  of  the  work  is  the  cause  of  great  waste.  Nearly 
all  extensive  Federal  works  are  financed  on  the  basis  of  as- 
sumed successive  annual  appropriations.  But  in  many  in- 
stances the  appropriations  necessary  to  uninterrupted  work 
are  not  made  and  the  work  is  suspended.  This  causes  ex- 
cessive delay  in  completion  and  largely  increased  cost.  It  com- 
monly requires  years  to  erect  a  public  building,  where  private 
enterprise  would  finish  a  similar  building  within  a  much 
shorter  time.  Contractors  always  consider  the  element  of  de- 
lay and  the  large  increase  in  cost  consequent  thereon,  and  con- 
tract prices  for  public  works  dependent  upon  successive  annual 
appropriations  are  always  materially  greater  than  in  the  case 
of  private  works.  Moreover,  where  the  construction  period 
is  unduly  protracted  there  are  large  and  wasteful  outlays  for 
interest  charges  and  administration  expenses,  and  loss  by  de- 
terioration of  plant. 

BAD  EFFECT  OF  PERIODIC  CHANGES  IN  CONGRESS. 

15: — The  personnel  of  Congress  changes  to  a  consider- 

14 


able  degree  every  two  years.  The  political  complexion  of  one 
or  both  houses  changes  at  uncertain  intervals.  The  President, 
who  has  power  to  nullify  what  Congress  adopts,  is  sometimes 
antagonistic  to  the  purposes  of  Congress.  Many  or  all  the 
'  experienced  members  of  important  committees  are  occasionally 
displaced  and  substituted  by  new  members  without  adequate 
knowledge  of  the  affairs  largely  subject  to  their  control.  The 
tendency  to  inertia  from  the  causes  recited  in  a  previous  para- 
graph is  greatly  increased  by  these  periodic  changes;  and  in 
the  event  of  a  complete  change  or  a  division  of  party  control, 
a  modification  or  reversal  of  policy  as  to  projects  previously 
authorized  is  also  very  likely. 

16: — An  incoming  party  always  criticises  the  acts,  and  par- 
ticularly the  expenditures  of  the  party  formerly  in  power,  and 
occasionally  undoes  the  acts,  or  withholds  support  from  the 
projects  of  the  latter.  Hence,  results  an  inconsistent,  halting 
and  vacillating  policy,  with  consequent  disruption  of  well-con- 
ceived and  excellent  plans  previously  authorized  but  still  in 
the  formative  stages;  the  suspension  of  work  upon 
construction  already  begun;  the  occasional  modification  or 
partial  change  of  physical  plans,  and  the  abandonment  of 
physical  works  which  have  cost  considerable  sums. 

17: — These  conditions  of  vacillating  or  hesitant  policy,  are 
destructive  of  executive  efficiency,  as  they  retard  or  prevent 
the  provision  of  essential  and  often  urgently  needed  struc- 
tures or  plant,  and  make  well  co-ordinated  and  economical 
operation  impossible. 

In  few  words,  the  results  of  vacillating  policy  are  intermit- 
tent or  inadequate  financial  support,  patchwork  planning,  piece- 
meal construction,  inadequate  plant,  makeshift  operation  and 
excessive  cost. 


Lf 

INFLUENCE  OF  SECTIONAL  DEMANDS  : 

18 : — It  is  inevitable  that  the  action  of  Congress  as  to  physi- 
cal undertakings  involving  large  outlays  is  greatly  swayed 
by  sectional  demands;  and  seldom  indeed  is  Congressional 
decision  as  to  purely  economic  projects  based  solely  upon 
economic  utility.  The  proposition  that  expenditures  for  pub- 
lic improvements  should  be  territorially  distributed  is  plausible 
and  popular,  however  economically  unsound.  The  pressure 
of  their  constituents  forces  most  Congressmen  to  support  that 
proposition,  whatever  their  private  view  may  be.  Hence  a 
wide  demand  for  local  improvements  to  which  Congress  must 
necessarily  give  consideration. 

19 : — Unless  concession  be  made  to  these  demands  a  hostile 
combination  will  prevent  the  passage  of  an  entire  appropriation 
bill,  and  thus  defeat  many  projects  which  are  perhaps  urgently 
necessary.  In  the  case  of  public  buildings  and  river  and  harbor 
improvements  the  sectional  demands  are  co-extensive  with  the 
National  territory;  and  in  perhaps  the  majority  of  cases 
have  little  economic  justification.  A  handsome  Federal  build- 
ing costing  several  hundred  thousand  dollars,  in  a  hamlet  of 
2500  people,  pleases  the  inhabitants  and  promotes  the  political 
fortunes  of  the  Congressman  who  secures  it;  but  it  is  of  no 
economic  benefit.  On  the  contrary,  it  represents  an  indefens- 
ible waste  of  public  money.  The  same  is  true  of  many  river 
and  harbor  improvements;  the  utility  of  some  of  which  is 
entirely  incommensurate  with  their  cost. 

20 : — Thus  it  happens  that  political  expediency  and  popular 
demand,  rather  than  economic  utility,  often  determine  the  ex- 
tent and  application  of  huge  appropriations.  Double  harm 
results.  Despite  the  great  extent  of  appropriations  for  pub- 
lic improvements,  much  of  the  money  is  absorbed,  in  response 

16 


to  sectional  demands,  for  economically  wasteful  local  projects, 
while  projects  of  National  benefit  and  the  highest  degree  of 
utility  are  insufficiently  provided  for. 

21  : — This  is  illustrated  by  the  haphazard  policy  of  river 
and  harbor  improvement.  While  upward  of  $700,000,000 
has  been  spent  for  this  purpose,  it  has  been  spent  piecemeal, 
largely  upon  unrelated  projects,  often  of  strictly  local  and 
limited  utility.  Had  it  been  spent  upon  a  comprehensive  and 
consistent  plan,  demised  for  the  development  of  a  complete 
interconnecting  National  system  of  waterways,  to  be  improved 
progressively  and  with  regard  to  their  general  utility,  the  bene- 
fit to  the  Nation  would  have  been  much  greater.  With  such 
a  policy  we  would  ultimately  have  a  system  of  canalized  rivers 
and  connected  waterways,  comparable  with  those  of  France 
and  Germany,  and  of  immeasurable  importance  in  our  trans- 
portation system.  Under  the  policy  actually  pursued  in  re- 
sponse to  sectional  demands,  the  benefit  has  been  relatively 
slight,  and  much  of  the  outlay  has  been  practically  wasted. 

22 : — Another  unfortunate  result  is  that  the  pressing  needs 
of  the  most  important  ports  of  the  Nation  are  relatively  neg- 
lected, in  order  that  the  aggregated  demands  from  other  sec- 
tions may  be  satisfied.  The  commerce  of  the  principal  ports 
is  a  National  and  not  a  local  concern,  but  relative  utility  car- 
ries little  weight  with  the  majority,  who  need  all  the  funds 
in  sight  to  provide  for  their  own  local  improvements. 

EVIL  EFFECTS  OF  INADEQUATE  PROVISION  FOR  BETTERMENTS 
AND  MAINTENANCE. 

23: — A  characteristic  defect  of  governmental  industrial  plants 
is  their  low  physical  efficiency.  This  is  due  to  the  almost  in- 
variable unwillingness  of  appropriating  bodies  to  permit  exist- 


ing  equipment  to  be  discarded  until  it  has  become  physically 
unserviceable ;  and  to  insufficient  outlays  for  maintenance.  A 
machine  is  no  longer  economical  when  a  new  and  better 
machine  will  give  a  larger  output  at  lesser  cost;  and  sound 
business  practice  discards  old  machinery,  even  if  in  perfect 
physical  condition,  and  substitutes  new  whenever  the  resultant 
saving  in  operating  costs  exceeds  the  interest  charges  on  the 
additional  capital  investment  required.  This  is  seldom  done 
in  governmental  plants,  and  in  consequence  operating  and 
maintenance  costs  per  unit  of  production  are  commonly  exces- 
sive. 

24: — Certain  small  pumping  engines  in  New  York's  water 
supply  system  illustrate  this.  The  engines  in  question  had 
been  many  years  in  commission  and  were  therefore  much  in- 
ferior, in  original  potential  performance,  to  more  modern 
types,  their  local  consumption  and  labor  costs  per  million  gal- 
lons pumped  being  relatively  very  large.  In  addition,  through 
wear,  their  actual  performance  had  decreased  greatly.  The 
average  annual  cost,  during  several  years,  of  repairs  to  main- 
tain these  engines  in  usable  condition,  to  average  about  one- 
half  rated  service,  was  about  $20,000.  They  could  have  been 
replaced  for  less  than  $100,000,  but  the  necessary  appropria- 
tions, frequently  urged,  were  as  uniformly  denied. 

T      25  : — Several  hundred  municipal  lighting  plants,  which  have 

/been  installed  in  various  parts  of  the  United  States,  have 
failed.  The  causes  have  been  various.  One  invariable  cause, 
always  present,  has  been  refusal  of  sufficient  appropriations 
for  maintenance  and  betterments,  whereby  the  plants  became 
inefficient  and  excessively  costly  of  operation. 

26: — No  large  industrial  enterprise  can  long  be  kept  eco- 
nomically efficient  without  a  continuous  addition  to  the  capital 

18 


investment,  to  provide  for  betterments.  Private  enterprise 
provides  such  new  capital  because  it  produces  corresponding 
earning  power ;  but  public  appropriating  bodies  can  seldom  be 
convinced  that  economy  requires  a  large  additional  capital 
outlay  for  the  partial  reconstruction  of  a  plant  which  was 
new  and  fully  efficient  ten  years  ago,  but  which  is  today  eco- 
nomically obsolete.  The  public  almost  invariably  considers 
a  first  large  investment  as  final,  and  violent  public  opposition, 
usually  assuming  political  form,  deters  legislative  bodies  from 
making  the  additional  appropriations  which  efficiency  and 
economy  require. 

27 : — It  is  very  seldom  that  public  appropriations  keep  pace 
with  immediate  and  pressing  needs;  still  more  seldom  that 
large  present  appropriations  are  made  for  needs  that  appear 
remote,  even  when  present  efficiency  and  future  economy  are 
thereby  served. 

28 : — Promptitude  in  supplying  telephone  service  and  econ- 
omy in  construction  require  the  provision  of  an  underground 
conduit  system  adequate  not  only  for  present  needs,  but  for 
those  of  several  years  to  come.  It  is  far  cheaper  to  build  a 
large  conduit,  much  in  excess  of  present  needs,  than  to  build 
a  succession  of  small  ones,  each  of  capacity  to  meet  only  cur- 
rent demands.  Hence,  in  the  City  of  New  York  and  in  other 
large  American  cities,  the  telephone  companies  have  many 
millions  of  dollars  invested  in  conduits  in  anticipation  of  needs 
from  five  to  ten  years  in  the  future.  This  policy  involves 
considerable  carrying  charges  on  unused  equipment,  but  the 
saving  in  construction  costs  is  much  greater  and  the  net  sav- 
ing is  large.  Moreover,  this  policy  of  preparedness  in  advance 
of  demand  enables  telephone  service  to  be  supplied  almost  in- 
stantly. In  Japan,  where  a  Government  telephone  system  was 
installed  a  few  years  ago,  facilities  are  supplied  piecemeal, 

19 


after  the  demand  accrues.  Hence  excessive  cost  of  installa- 
tion and  excessive  delay  in  meeting  the  public  needs;  so  that 
from  a  year  to  a  year  and  a  half  or  more  elapses  before  an 
applicant  for  a  telephone  gets  it.  Similar  conditions,  although 
in  a  lesser  degree,  prevail  in  the  telephone  service  of  England, 
France  and  other  foreign  countries. 

29 : — It  is  unreasonable  to  assume  that  legislatures  which 
are  dilatory  in  providing  for  pressing  and  immediate  needs 
will  authorize  large  outlays  years  in  advance  of  present  needs, 
however  economically  desirable  such  outlays  may  be,  and  how- 
ever necessary  to  prompt  supplying  of  service. 

30 : — In  the  present  restricted  field  of  governmental  physical 
undertakings,  insufficient  betterment  and  maintenance  outlays 
are  a  prolific  cause  of  excessive  cost  and  inefficient  service. 
The  harmful  effects  would  be  multiplied  many  fold  if  ex- 
tended by  governmental  intervention  into  highly  complex  in- 
dustrial fields  such  as  railroad  or  telephone  operation. 

Ill:— ADMINISTRATIVE  INEFFICIENCY  OF   GOVERN- 
MENTAL MANAGEMENT  AND  ITS  CAUSES. 

31  : — In  the  conduct  of  large  business  corporations  the  chief 
executives  are  chosen  because  of  their  proved  fitness.  They 
are  the  product  of  evolution.  They  commonly  begin  in  the 
lowest  ranks  of  the  service.  In  subordinate  positions,  they 
display  more  than  average  ability,  zeal  and  initiative.  Be- 
cause of  these  qualities  they  rise  above  their  fellows  and  are 
selected  for  more  important  positions.  Their  qualities 
develop  with  opportunity.  Their  best  effort  is  en- 
listed through  self-interest,  for  there  is  keen  competition 
for  advancement,  large  opportunity  for  it,  and  the  best  man 
wins.  Rapid  promotion  comes  to  the  man  who  proves  himself 

20 


best  qualified  to  perform  the  service  required.  In  his  upward 
progress  by  successive  steps  the  future  high  official  acquires 
intimate  knowledge  of  every  detail  of  the  business,  of  the  best 
methods,  of  efficient  organization,  of  the  merits  and  varying 
capacity  of  his  fellow  workers,  of  discipline,  of  all  the  com- 
plex matters  which  an  efficient  executive  must  know  and  control. 

32 : — Thus  exceptional  capacity,  developed  by  special  train- 
ing and  long  and  comprehensive  experience,  is  characteristic 
of  the  principal  executive  officials  of  large  industrial  corpora- 
tions; and  they  are  chosen  because  of  that  qualification.  They 
have  the  confidence  of  their  directors,  are  given  prompt  and 
ample  support,  and  have  full  control  over  organization,  dis- 
cipline, promotion,  and  all  details  of  operation.  Contrary 
conditions  govern  the  selection  of  governmental  executives; 
and  the  methods  employed  are  peculiarly  unsuited  to  securing 
officials  competent  properly  to  carry  on  a  business  undertaking. 

GOVERNMENTAL   METHODS  OF   SELECTING  ADMINISTRATIVE 
OFFICIALS  UNSUITED  TO  BUSINESS  OPERATIONS. 

33  : — Almost  invariably  the  selection  of  governmental  exec- 
utives is  based  upon  considerations  other  than  the  qualifica- 
tions indispensable  to  a  good  business  manager.  The  method 
of  selection  considers  popularity  and  disregards  proficiency. 
It  accepts  active  intelligence  as  the  equivalent  of  highly  spe- 
cialized training.  It  assumes  that  brilliance  is  synonymous 
with  sound  judgment.  It  assumes  that  a  brilliant  lawyer,  a 
high-minded  and  intellectual  idealist,  a  sincere  and  vociferous 
reformer,  or  a  shrewd  and  able  practical  politician,  is  as 
capable  of  managing  intricate  business  affairs  as  a  man  of 
long  experience,  intimate  knowledge  and  highly  developed 
skill  in  the  especial  field  concerned. 


21 


34 : — These  assumptions  are  of  course  in  the  great  majority 
of  cases  mistaken.  Intellectual  brilliance  is  not  a  guarantee 
of  sound  judgment  and  in  the  long  run  not  a  dependable  sub- 
stitute for  special  training  and  ample  experience.  Quick  un- 
derstanding is  by  no  means  a  synonym  for  organizing  capacity. 
No  man,  however  intellectually  able,  could  successfully  or- 
ganize or  operate  a  great  department  store  without  long  ex- 
perience and  intimate  knowledge  of  infinite  detail.  The  fact 
that  a  political  leader  has  won  a  large  popular  following  in  a 
radical  section,  by  promoting  harmful  and  even  destructive 
economic  legislation,  does  not  qualify  him  to  operate  a  railroad 
efficiently. 

35  : — But  under  a  popular  form  of  government,  extensive 
changes  in  administrative  officials  at  frequent  intervals  are 
inevitable.  It  is  equally  inevitable  that  the  political,  forces 
which  decree  the  changes  shall  dominate  the  selection  of  the 
new  officials,  and  that  political  considerations,  and  not  com- 
plete fitness  shall,  in  the  main,  determine  the  selections. 

36: — We  thus  commonly  have,  at  the  outset,  initial  unfit- 
ness  on  the  part  of  the  business  managers  selected  by  Govern- 
ment, in  the  sense  of  lack  of  the  especial  qualifications  required 
for  effective  performance  of  the  business  function.  Even  men 
of  much  general  ability,  when  injected  into  a  vast  and  intri- 
cate business  machine  of  whose  methods  and  details  they  are 
profoundly  ignorant,  must  flounder  woefully  for  a  consid- 
erable time  and  depend  upon  their  subordinates.  But  in  gov- 
ernment business  the  principal  subordinates  also  are  usually 
displaced,  when  the  chief  is  changed,  by  new  and  equally  un- 
tried or  unfit  men;  and  until  the  chief  can  get  his  bearings, 
the  machine  runs  by  the  inertia  of  ancient  routine.  In  effect, 
we  have  for  a  time  government  by  Chief  Clerks. 

22 


37 ' — It  is  quite  true  that  men  of  good  capacity,  experienced 
in  other  fields,  may  in  time  "learn  their  jobs,"  and  develop  into 
capable  business  managers;  although,  at  the  best,  it  is  unrea- 
sonable to  assume  that  relatively  brief  experience  in  a  new  and 
complex  field  will  develop  efficiency  equal  to  that  derived  from 
life-long  experience.  Unfortunatey,  the  time  required  fully 
to  learn  the  job  is  denied  by  reason  of  short  tenure  of  office. 
Before  the  process  can  be  completed,  a  change  in  officials  en- 
sues, and  the  educational  task  must  be  begun  anew.  Of 
course,  the  business  drifts  while  the  heads  are  learning.  Any 
private  business  would  speedily  succumb  to  such  conditions. 

38: — This  phase  of  the  subject  was  cogently  summarized 
by  a  Joint.  Congressional  Commission  which  in  1908  reported 
upon  the  "Business  Method  of  the  Post  Office  Department. " 
TnT  members  of  the  Commission  were  Senators  Penrose, 
Carter  and  Clay;  Representatives  Overstreet,  Gardner  and 
Moon.  In  its.  report  the  Commission  said : 

"For  more  than  one  hundred  years  the  great  and  stupendous 
business  of  the  Post  Office  Department  has  been  operated  without 
being  overhauled  or  looked  into  from  the  point  of  critical,  expert 
scrutiny  of  its  business  methods  *  *  *.  It  appears  too  obvious 
to  require  argument  that  the  most  efficient  service  can  never  be 
expected  as  long  as  the  direction  of  the  business  is,  as  at  present, 
intrusted  to  a  Postmaster-General  and  certain  assistants  selected 
without  special  reference  to  experience  anT~qualificatibns  and  sub- 
ject to  frequent  change.  Before  the  Postmaster-General  and  his 
assistants  can  "become  reasonably  familiar  with  the  operations  of 
the  service,  they  are  replaced  by  others,  who,  in  turn,  are  called 
upon  to  resign  before  they  can,  in  the  nature  of  things,  become 
qualified  by  knowledge  and  experience  to  perform  their  allotted 
tasks.  Under  such  a  system  a  large  railroad,  commercial,  or  indus- 
trial business  would  inevitably  go  into  bankruptcy,  and  the  Post 
Office  Department  has  averted  that  fate  only  because  the  United 
States  Treasury  has  been  available  to  meet  deficiencies.^' 

~ 


23 


DEMORALIZING  EFFECT  OF  FREQUENT  CHANGES  IN  MANAGE- 
MENT. 

39 : — In  industrial  affairs  frequent  changes  in  management 
tend  seriously  to  impair  the  proper  co-ordination  of  the  busi- 
ness machine.  Each  new  official  is  likely  to  make  changes  in 
method  and  in  personnel.  Even  when  wise  and  desirable,  such 
changes  are  apt  to  produce  temporary  dislocation  until  opera- 
tions have  become  adjusted  to  the  new  conditions.  If  changes 
are  illy-considered,  as  is  certain  to  be  the  case  when  they  are 
made  by  inexperienced  or  otherwise  unqualified  officials,  the 
result  is  bad  co-ordination  and  impaired  efficiency  along  the 
whole  line.  In  public  affairs  the  succession  of  new  officials 
is  unending.  They  are  the  co-ordinating  force  of  the  affairs 
with  which  they  are  charged,  and,  by  reason  of  their  newness, 
they  are  usually  incompetent  effectively  to  perform  the  func- 
tion upon  which  the  efficiency  of  the  organization  as  a  whole 
depends. 

40 : — Illy-considered  and  often  harmful  changes  in  methods 
and  personnel  are  invariable  accompaniments  of  changes  in  the 
managing  officials  in  charge  of  public  industrial  works.  Nearly 
every  new  official  thinks  that  extensive  reforms  in  methods 
and  organization  are  necessary,  and  is  usually  right  in  so  think- 
ing. But  he  generally  ignores  the  fact  that  intimate  knowledge 
and  years  of  experience  are  requisite  to  devise  new  methods 
which  will  actually  promote  efficiency.  The  result  of  his 
efforts  in  such  case  is  a  new  pattern  of  patchwork  and  not 
a  new  and  better  machine.  He  has  provided  some  new  cogs 
which  do  not  gear  with  old  ones ;  the  new  cogs  make  a  better 
show,  but  the  machine  does  not  work  any  better  than  before. 
He  makes  a  show  of  improvement  but  fails  in  its  substance, 
because  he  does  not  really  know  the  right  thing  to  do,  nor  the 

24 


right  way  to  do  it ;  and  doing  the  wrong  thing  slows  down  the 
works. 

41  : — Thus  by  reason  of  the  changes  in  method  which  almost 
uniformly  follow  changes  in  public  officials,  bad  co-ordination, 
and  therefore  low  efficiency  is  a  distinguishing  characteristic 
of  public  management,  especially  in  the  case  of  physical  works. 

42 : — Evils  of  another  class  result  when  the  new  executive, 
conscious  of  his  at  least  temporary  inability,  seeks  refuge  in 
inaction,  and  is  content  to  be  a  rubber  stamp.  In  that  event 
the  actual  conduct  of  affairs  falls  to  a  large  degree  into  the 
hands  of  minor  officials,  each  of  whom  is  intent  upon  enlarg- 
ing the  importance  of  his  own  bureau,  and  conducts  it  so  far 
as  possible  with  jealous  disregard  of  the  operations  of  other 
bureaus.  Differing  and  sometimes  conflicting  methods,  great 
inertia,  lack  of  co-ordination  and  imperfect  functioning  are 
the  consequence. 

The  report  of  the  Penrose  Commission  forcibly  shows  the 
evils  which  have  arisen  in  the  Post  Office  Department  from 
this  cause. 

HAMPERING  LIMITATIONS  UPON  EXECUTIVES. 

43  : — Even  executives  of  the  highest  capacity  cannot  be 
fully  effective  under  the  hampering  conditions  which  prevail 
in  Governmental  management,  for  the  reason  that  they  are 
deprived  of  necessary  discretionary  power. 

A  fundamental  theory  of  our  Government  is  that  executive 
power  shall  be  restricted,  in  order  that  the  rights  and  liberties 
of  the  people  shall  not  be  subverted  by  abuse  of  such  power. 
It  cannot  seriously  be  questioned  that  such  restriction  in  Gov- 
ernmental affairs  is  necessary  and  wise,  but  from  that  very 
necessity  proceeds  the  inability  of  Government  executives  to 

25 


act  efficiently  in  industrial  undertakings.  The  public  welfare 
requires  an  elaborate  system  of  check  upon  executive  action, 
but  the  machinery  of  check  in  public  affairs  is  always  the  ma- 
chinery of  inertia  and  frequently  of  paralysis. 

44: — Congress,  having  the  power  to  determine  the  sphere 
of  activity  of  executive  officials,  is  very  tenacious  of  that  power 
and  asserts  it  with  great  jealousy.  This  is  well  illustrated  by 
the  language  of  Senator  Bourne,  in  the  Report  of  the  Bourne 
Commission  on  Railway  Mail  Pay.  The  Senator  said: 

"It  will  be  observed  that  the  bill  which  this  Committee  recom- 
mends for  enactment  leaves  as  little  as  possible  to  the  discretion  of 
the  officers  of  the  Post  Office  Department.  We  believe  this  of  para- 
mount importance  *  *  *.  We  believe,  therefore,  that  in  the 
fulfillment  of  its  obligations  to  the  country,  it  is  the  duty  of  Con- 
gress, so  far  as  practicable,  to  enact  laws  in  such  form  that  a 
minimum  amount  of  discretionary  power  shall  be  vested  in  adminis- 
trative departments,  so  that  the  measure  of  every  man's  rights  and 
duties  and  responsibilities  will  be  clearly  and  definitely  stated  on 
the  pages  of  our  statutes  *  *  *.  The  greed  for  power  manifested 
by  this  recommendation  [of  the  Postmaster-General]  is  surpassed 
only  by  the  concentrated  egotism  which  prompted  the  belief  that 
the  Department  could  exercise  such  power  if  granted.  Possessed 
of  the  power  the  Post  Office  Department  has  requested  in  the 
various  measures  it  has  proposed  and  advocated,  the  Postmaster- 
General  might  well  exclaim,  in  the  language  of  a  famous  European 
monarch,  <  The  State— I  am  the  State ! ' 

"Unless  confronted  by  the  record  of  its  recommendations,  we 
would  be  loath  to  believe  that  any  administrative  department  could 
presume  to  ask  such  a  delegation  of  power  from  an  intelligent,  self- 
respecting  legislative  body,  imbued  with  a  fair  appreciation  of  its 
own  functions." 

45 : — Aside  from  the  merits  of  the  particular  proposition 
thus  stigmatized  by  an  able  senator,  it  is  self-evident  that  the 
intimate  and  friendly  relations  between  directorate  and  execu- 
tive which  are  necessary  to  efficiency  cannot  exist  when  Con- 

26 


gress  resents  and  withholds  powers  without  which  the  execu- 
tive cannot  be  efficient. 

46: — While  many  executive  requests  are  unreasonable  and 
are  properly  denied,  it  is  equally  true  that  Congress  continu- 
ally maintains  limitations  upon  executive  discretion  which 
make  good  administration  impossible.  Its  constant  aim  is, 
as  expressed  by  Senator  Bourne,  to  leave  as  little  as  possible 
to  the  discretion  of  executive  officials.  It,  therefore,  completely 
reverses  the  methods  that  are  necessary  to  business  efficiency. 
It  prescribes  and  regulates  in  minute  detail  the  methods  which 
shall  be  followed  by  the  executive,  and  thereby  deprives  him  of 
necessary  discretion.  He  cannot  displace  a  defective  method 
by  a  better  one  by  reason  of  the  existence  of  a  law  which  pre- 
cludes such  action  upon  his  part.  He  cannot  materially  change 
the  framework  of  the  organization  through  which  he  must 
work,  because  the  law  has  prescribed  specified  divisions,  bu- 
reaus and  sub-divisions  which  must  continue  until  changed  by 
law.  He  cannot  materially  change  the  personnel  of  his  organ- 
ization, but,  in  the  main,  must  take  what  is  handed  to  him  by 
his  predecessor.  He  cannot  create  places  when  required  for 
operating  purposes,  fix  salaries  or  control  promotions  except 
to  a  limited  extent.  His  powers  of  discipline  are  restricted  by 
the  Civil  Service  Laws  and  relatively  inefficient  employees 
are,  therefore,  safe  unless  their  transgression  is  flagrant. 

47: — In  industrial  undertakings,  conditions  are  constantly 
changing  and  the  methods  of  management  must  be  quickly 
adapted  to  meet  the  changed  conditions.  It  is  necessary,  there- 
fore, that  the  executive  have  large  discretion  as  to  methods, 
personnel,  choice  of  assistants,  salaries  and  promotions.  The 
limitations  which  Congress  imposes  deny  all  these  to  the 
executive.  The  result  is  rigidity  of  method  which  tends  to  os- 
sification, whereas  elasticity  is  requisite. 

27 


48  : — The  strict  inhibition  by  Congress  of  any  outlays  not 
specifically  authorized  by  itself  is  particularly  obstructive  in 
many  minor  but  necessary  details  of  administration.  On  this 
point  we  quote  from  the  documents  of  the  Penrose  Commis- 
sion: 

"The  system  of  appropriations  which  is  admittedly  necessary 
in  the  Government  service  is  another  feature  in  which  the  Post  Office 
differs  from  a  private  corporation.  In  the  latter  appropriations  are 
made  for  specific  purposes  in  the  shape  of  authorities  given  by  the 
highest  officials  for  current  expenditures,  and  if  at  any  time  these 
appropriations  are  found  to  be  insufficient  or  if,  for  any  reason,  it 
is  deemed  advisable  to  increase  the  expenditure,  this  can  be  done 
immediately,  and  even  if  the  amount  authorized  be  exceeded,  pro- 
vided that  proper  reasons  are  given,  no  exception  is  taken  and  no 
harm  done. 

"In  the  case  of  appropriations  by  Congress,  however,  it  is 
entirely  different.  There  are  strict  penalties  for  exceeding  an 
appropriation  *  *  *.  In  the  course  of  our  investigation  we  have 
found  many  instances  in  which  the  work  in  certain  divisions  has  had 
absolutely  to  stop  before  the  end  of  the  fiscal  year  because  the 
appropriations  had  become  exhausted.  (  In  Cincinnati,  for  example, 
the  printing  plant  was  lying  idle  for  weeks,  all  the  salaries  of  the 
printers  continuing  as  usual,  owing  to  the  appropriations  for  paper 
being  exhausted.  Meantime,  the  printing  necessary  was  done  by 
an  outside  printer  and  paid  for  under  some  other  appropriation.) 

^  "The  traveling  allowances  of  the  officials  of  the  Eailway  Mail 
Service,  whose  duties  consisted  of  personal  inspection  of  the  effi- 
ciency and  needs  of  the  service,  having  reached  the  limit  set  by  the 
appropriation,  these  men  were  compelled  to  allow  their  work  to 
lapse  for  several  weeks  before  the  close  of  the  fiscal  'year.  It  is 
obvious  that,  under  such  conditions,  the  service  must  suffer  *  *  *. 
There  is  a  lamentable  lack  of  labor-saving  devices  practically  through- 
out the  whole  Department  and  Service,  even  for  such  an  elementary 
machine  as  a  typewriter.  We  are  informed  that  there  are  hundreds 
of  applications  on  file  which  the  department  has  been  quite  unable 
to  fill.  Of  the  more  complicated  machines,  such  as  arithmometers, 
book  typewriters  and  calculating  machines,  there  are  few  in  use 
and  even  in  the  field  Post  Offices  such  scales  as  are  provided  for  the 
special  weighing  of  mails  now  in  progress  are  of  a  very  inferior 
grade  and  from  the  information  we  have  gathered  it  would  appear 


that,  with  few  exceptions,  there  are  no  mechanical  conveying  devices 
in  any  office  for  expeditiously  handling  and  weighing  the  mails." 

It  is  obvious  that  under  such  hampering  conditions  as  have 
been  recited,  efficiency  on  the  part  of  any  executive  is  greatly 
reduced. 

49.— Another  contributing  cause  to  executive  inefficiency  is 
the  prolonged  delay  of  Congress  in  determining  important 
questions  of  policy,  and  the  delaying  or  withholding  of  indis- 
pensable appropriations.  This  phase  of  the  subject  has  been 
discussed  in  Paragraphs  13,  14  and  23,  and  need  not  be  re- 
peated. 

LACK  OF  SELF-INTEREST  AS  AN  INCENTIVE. 

50 : — The  motive  of  self-interest  is  dominant  in  all  indus- 
trial enterprises.  It  induces  the  investment  of  capital  therein ; 
it  permeates  the  directorate  and  enlists  the  careful  attention 
and  best  energies  of  its  members;  it  operates  powerfully  to  de- 
velop executive  officials  of  the  highest  ability  and  to  secure 
the  assiduous  devotion  of  that  ability  to  the  efficient  and  profit- 
able management  of  the  properties.  It  secures  similar  zeal 
upon  the  part  of  all  minor  officials,  and  induces  faithful  and 
diligent  service  by  the  rank  and  file  of  employees. 

Throughout  the  entire  service  of  an  industrial  corporation 
employing  thousands  of  men,  practically  every  one  will  be 
stimulated  by  the  desire  to  better  his  condition  through  faith- 
ful service  and  the  free  opportunity  afforded  him  by  industrial 
organizations. 

51 : — The  incentive  of  self-interest  proceeds  from  the  sys- 
tem of  promotion  which  prevails  in  private  employment; 
namely,  free  selection  by  the  higher  officials  from  the  ranks 
of  their  respective  subordinates,  of  those  who  prove  them- 

29 


selves  best  qualified  for  more  important  duties.  Efficiency 
and  economic  value  are  the  tests.  Under  such  a  system 
the  opportunities  are  numerous;  the  rewards  in  the  form  of 
salary  increase  are  substantial;  and  the  best  energies  of  every 
worker  are  enlisted  to  promote  the  interests  of  the  business. 

52 : — Contrary  conditions  prevail  in  Governmental  service. 
Formerly,  when  the  executive  was  given  a  free  hand  in  the 
matter  of  selection  and  promotion,  the  great  body  of  em- 
ployees was  selected  almost  entirely  without  regard  to  fitness 
and  with  a  view  to  political  considerations.  The  number  of 
employees  was  constantly  swelled  and  invariably  far  exceeded 
the  number  required  for  the  functions  to  be  performed.  Pro- 
motions were  made  upon  a  basis  of  favoritism  and  political 
usefulness,  and  often  regardless  of  efficiency.  The  wasteful- 
ness was  extreme  and  the  morale  of  the  workers  was  com- 
pletely demoralized.  Efficient  and  faithful  men  were  dis- 
couraged by  being  passed  over,  while  worthless  fellow  em- 
ployees were  promoted.^ 

53 : — To  prevent  these  political  abuses  the  Civil  Service 
Laws  were  enacted  to  regulate  the  conditions  of  selection  and 
promotion.  These  laws  have  succeeded  in  greatly  reducing 
the  political  abuses  indicated,  but  they  have  caused  another 
class  of  evils.  While  they  have  given  security  of  tenure  to 
employees,  they  tend  to  retain  in  place  the  relatively  inefficient 
as  well  as  the  deserving,  and  they  deprive  the  executive  of 
the  power  of  choosing  for  promotion  the  men  best  qualified 
for  more  important  duties.  The  higher  places,  moreover,  not 
being  under  the  operation  of  the  Civil  Service  Laws,  are  still 
open  to  appointments  by  favoritism  and  political  influence, 
and  the  great  stimulus  of  opportunity  to  fill  these  higher  places 
is  thereby  taken  away  from  the  rank  and  file,  who  are  reduced 
to  discouragement  and  to  the  performance  of  duty  in  a  per- 

30 


functory  way,  by  reason  of  the  absence  of  an  incentive,  of 
which  they  are  deprived  by  existing  conditions. 

54:  —  The  Twenty-third  Report  of  the  Civil  Service  Com- 
mission says  :  — 

"The  great  defect  in  the  Federal  Service  today  is  the  lack  of 
opportunity  for  ambitious,  well-educated  young  men.  All  of  the  higher 
positions  are  outside  of  the  competitive  classified  service  and  no 
system  has  been  established  by  which  those  who  have  distinguished 
themselves  in  the  service  can  be  promoted  to  the  more  important 
offices  and  at  the  same  time  enjoy  reasonable  security  of  tenure. 
There  is  not  sufficient  inducement  for  the  most  capable  men  to  enter 
the  examinations,  as  they  can  do  better  by  seeking  employment  in 
large  corporations,  trusts,  and  other  institutions  where  they  can  in 
time  command  much  higher  salaries  than  they  can  ever  hope  to  secure 
in  the  Government  service  *  *  *.  The  Government  cannot  hope 
to  compete  with  private  employers  unless  it  pays  salaries  that  measure 
up  fairly  well  to  the  standard  of  private  business." 

55  :  —  The  absence  of  self-interest  as  an  incentive  degrades 
the  standards  of  personal  efficiency  in  the  Governmental  service. 
It  is  difficult  to  secure  in  the  higher  administrative  posi- 
tions the  services  of  men  of  first-class  specialized  ability,  by 
reason  of  the  excessively  low  salaries  paid  by  the  Government 
as  compared  with  those  paid  by  large  corporations  ;  by  reason 
of  the  insecurity  of  tenure;  and  the  hampering  conditions 
already  explained,  which  prevent  able  men  from  being  fully 
effective. 


the  lower  ranks,  while  the  employees  are  commonly 
paid  more  than  similar  work  commands  in  private  enterprises, 
there  is  small  opportunity  to  rise  and  little  or  no  reward  for 
exceptional  ability.  Under  these  conditions,  the  best  and  most 
ambitious  men  eventually  leave  the  Government  employ,  and 
thereby  reduce  the  general  level  of  capacity  of  the  entire  body 
of  employees  and  place  it  upon  a  much  lower  plane  than  pre- 
vails in  private  business. 


LACK  OF  STANDARDS  OF  EFFICIENCY  AND  WASTEFULNESS  IM- 
POSED BY  LAW. 

57 : — A  high  standard  of  efficiency  on  the  part  of  every 
employee  is  a  chief  concern  in  all  private  business.  In  manu- 
facturing undertakings,  especially,  it  is  vital  to  continued  ex- 
istence, for  competition  would  soon  wipe  out  any  corporation 
whose  labor  costs  were  excessive.  To  control  this  important 
element,  tasks  are  minutely  sub-divided  and  careful  records 
are  kept  of  the  time  required  for  and  the  output  of  every 
separate  operation.  The  extent  of  the  work  which  should  be 
performed  by  every  employee  is  thus  developed  and  all  em- 
ployees are  held  to  the  fixed  standards.  Labor  costs  are  thus 
held  to  a  minimum  and  the  due  productivity  of  every  employee 
assured. 

58: — These  industrial  methods  are  seldom  employed  in 
Governmental  work.  The  cost  of  caring  for  public  buildings 
is  commonly  more  than  twice  the  cost  in  the  case  of  private 
buildings.  When  streets  are  repaired  by  Government  labor, 
the  cost  is  usually  excessively  great.  In  public  offices,  the 
cost  of  clerical  services,  when  tested  by  the  work  performed, 
is  usually  several  times  that  of  similar  services  in  the  case  of 
large  corporations. 

59: — A  striking  illustration  of  the  difference  between  Gov- 
ernmental and  private  methods  in  the  matter  of  efficiency  is 
supplied  by  the  Tavenner  Bill  passed  by  the  last  Congress, 
which  forbids  th'e  use  in  Government  offices  of  means  for  pro- 
viding standards  of  efficiency  and  thereby  exacting  from  em- 
ployees a  fair  measure  of  service.  A  low  rate  of  productivity 
of  course  results  from  the  conditions  outlined  above. 

60: — With  this  is  combined  a  further  element  of  wasteful- 
ness resulting,  in  several  states,  from  legislation  affecting  the 

32 


rate  of  wages  to  be  paid  in  certain  public  employments.  In 
the  State  of  New  York  workmen  employed  upon  public  works, 
whether  directly  in  public  employ  or  in  the  employ  of  con- 
tractors, must  be  paid  the  so-called  current  rate  of  wages. 
The  rate  so  fixed  is,  in  fact,  commonly  much  in  excess  of  the 
true  rate  of  wages  prevailing.  In  some  states  the  materials 
used  in  public  works  must  be  locally  produced,  the  bringing 
of  better  and  cheaper  material  from  other  States  thereby  being 
precluded.  In  some  instances,  this  limitation  works  directly 
for  the  benefit  of  a  very  small  class  of  producers  and  naturally 
results  in  excessive  cost. 

6 1 : — The  standards  of  efficiency  of  Government  employment 
are  materially  lower  than  those  of  private  employment.  The 
rate  of  wages  for  minor  employees  is  materially  greater;  the 
hours  of  labor  are  materially  shorter.  These  factors  com- 
bined result  in  excessive  labor  costs  for  all  Government  under- 
takings. If  the  public  utilities  of  the  country  are  taken  over 
by  the  Government,  there  will  be  somewhat  more  than  three 
million  government  employees.  Let  this  number  be  multi- 
plied by  the  difference  between  the  labor  costs  of  Govern- 
ment work  and  private  work,  and  a  formidable  aggregate 
increase  in  labor  costs  would  result,  probably  fully  equal  to 
the  profits  now  accruing  from  private  investmewts  in  public 
utilities. 


IV:— POLITICAL  AND  FINANCIAL  CONSIDERATIONS* 

62 : — There  are  at  present  approximately  2,000,000  rail- 
way employees  in  the  United  States.  Other  public  utilities, 
including  telephones,  telegraphs,  electric  lighting  plants,  urban 
and  inter-urban  electric  railways,  other  street  railways,  water 
transportation  lines  and  express  service,  will  raise  the  aggre- 

33 


gate  number  of  employees  who  would  ultimately  enter  some 
form  of  Governmental  employ  under  Government  operation 
of  public  utilities  to  about  3,000,000  persons. 

63 : — No  proper  consideration  of  this  subject  can  ignore 
the  political  dangers  which  might  readily  arise  from  this 
source.  Senator  Bourne  points  out  that  in  the  last  ten  presi- 
dential elections  the  President  has  been  elected  by  a  plurality 
varying  from  7000  plus  to  a  little  more  than  2,500,000.  A  body 
of  government  employees  numbering  3,000,000  intent  upon 
better  pay,  less  service,  shorter  hours,  and  other  personal  ad- 
vantages, might  readily  hold  the  balance  of  power  between 
the  principal  opposing  political  parties,  and  make  the  choice 
of  a  President  and  the  policies  and  methods  of  government 
dependent  upon  concession  of  demands  made  by  an  organiza- 
tion of  Government  employees.  So  numerous  a  body  of 
voters,  animated  by  a  common  purpose,  might  well  become  a 
"third  party,"  frequently  holding  the  balance  of  power  and 
making  the  direct  purposes  of  Government  and  the  welfare 
of  the  whole  people  subordinate  to  their  own  selfish  purposes— 
a  Pretorian  guard,  choosing  the  emperor  and  dictating  all  the 
affairs  of  the  empire. 

64: — The  outstanding  securities  of  the  railroads,  together 
with  their  unfunded  debt,  is  now  in  excess  of  $20,000,000,000. 
The  aggregate  securities  and  unfunded  debt  of  other  public 
utility  corporations  is  approximately  $8,000,000,000,  a  total 
of  $28,000,000,000  of  invested  capital  represented  by  stocks 
and  bonds,  which  would  have  to  be  refunded  and  substituted 
by  National,  State  or  Municipal  securities  if  public  utilities  be 
governmentalized. 

65  : — One  argument  invariably  advanced  in  support  of  Gov- 
ernment ownership  and  operation  is  the  saving  in  interest 

34 


charges  due  to  the  superior  credit  of  governments.  It  may 
be  assumed,  therefore,  that  the  oustanding  corporation  securi- 
ties which  now  return  interest  or  dividends  at  the  rate  of 
from  5%  to  8%  would  be  substituted  by  Government  bonds 
carrying  interest  at  3%. 

66: — No  refunding  operation  equal  in  extent  and  danger 
to  this  has  ever  been  undertaken.  To  suddenly  reduce  the 
earning  power  of  $28,000,000,000  of  capital  by  more  than 
one-half  would  probably  produce  a  financial  cataclysm,  and 
would  certainly  profoundly  disturb  the  entire  financial  and 
economic  structure  of  the  country.  All  the  enormous  invest- 
ments of  savings  banks  and  life  insurance  companies  would 
be  rendered  either  little  profitable  or  unsafe.  The  ordinary 
investment  channels  which  assure  a  combination  of  safety  with 
a  moderate  return  of  profit  would  be  in  large  degree  closed 
and,  as  is  always  the  case  when  great  volumes  of  free  capital 
are  seeking  profitable  use,  speculative  investment  in  unsound 
companies  and  ultimate  loss  would  be  greatly  promoted.  Pos- 
sibly some  safe  means  of  effecting  the  enormous  refunding 
operation  indicated  might  be  found,  but  the  dangers  attendant 
upon  it  should  not  be  overlooked. 

67 : — The  railroads  of  the  country  now  contribute  to  the 
cost  of  government  more  than  $150,000,000  each  year  in  the 
form  of  taxes.  The  taxes  paid  by  other  public  utilities  would 
probably  increase  the  total  to  over  $200,000,000.  The  funds 
derived  from  these  taxes  accrue  to  the  several  states,  munici- 
palities, or  other  political  divisions  where  the  property  is 
located.  In  the  event  that  these  utilities  become  the  property 
of  the  Federal  Government,  they  would  no  longer  be  subject 
to  taxation  and  the  several  states,  and  their  inferior  sub-divi- 
sions, would  thereby  be  deprived  of  a  principal  source  of 
revenue  from  which  to  meet  the  expenses  of  government.  One 

35 


result,  therefore,  of  government  ownership  of  public  utilities 
would  be  that  other  forms  of  property  would  have  to  bear  a 
materially  increased  burden  of  taxation. 


V:-SUMMARY  AND  CONCLUSION. 

68: — The  defects  of  Government  procedure  in  economic 
undertakings  have  been  outlined.  Those  defects  arc  ineradic- 
able because  they  are  rooted  in  our  political  institutions.  The 
principles  that  govern  political  action  and  those  that  govern 
economic  action  are  fundamentally  different  and  cannot  be 
reconciled. 

69 : — The  purposes  intended  and  the  methods  by  which  they 
are  accomplished  are  inherently  different  and  in  many  re- 
spects antagonistic.  Political  action  takes  concrete  form  only 
after  a  long  period  of  deliberation  and  discussion  and  the  pro- 
cesses of  legislative  bodies  are,  therefore,  almost  invariably 
slow.  The  application  of  such  methods  of  long  delay  to  the 
conduct  of  economic  affairs  is  destructive  and  any  business 
conducted  on  such  principles  would  speedily  die. 

70 : — In  political  affairs  the  welfare  of  the  people  requires 
that  as  little  power  as  possible  be  granted  to  the  executive. 
The  proper  conduct  of  economic  affairs  requires  that  very 
large  powers  and,  in  certain  particulars,  unhampered  discre- 
tion be  given  the  executive.  In  private  affairs  the  powerful 
motive  of  self-interest  is  always  present  and  exerts  a  potent 
influence  upon  all  concerned  therein.  This  motive  has  but 
a  limited  existence  in  public  affairs  and  where  it  exists  is  often 
opposed  to  the  public  welfare. 

71 : — In  the  management  of  industrial  undertakings  the  leg- 
islative branch  of  governments  commonly  fails  to  provide 


funds  when  needed,  is  vacillating  and  dilatory  in  deciding  ques- 
tions of  policy,  retains  to  itself  powers  without  which  the  exec- 
utive cannot  effectively  act,  and  does  not  and  cannot  main- 
tain with  the  executive  the  close  relations  essential  to  good 
management,  nor  afford  the  support  without  which  the  ex- 
ecutive is  incapable  of  full  effectiveness. 

72 : — In  the  executive  branch  inexperience,  and  therefore 
at  least  temporary  incapacity,  is  the  rule  as  to  the  chief  officials. 
When  capacity  exists  or  has  been  developed  by  experience,  its 
exercise  is  largely  precluded  by  frequent  change  of  officials 
and  conditions  of  law  imposed  by  Congress, — conditions  which 
preclude  proper  financing,  capable  executive  management  and 
effective  co-ordination.  The  highest  degree  of  efficiency  and 
economy  is  therefore  made  impossible,  not  because  of  unintelli- 
gence  or  improper  purpose  either  on  the  part  of  Congress,  the 
executive  officials,  or  the  members  of  the  staff,  but  by  reason 
of  the  fact  that  the  harmful  conditions  indicated  cannot  be 
escaped  when  a  form  of  procedure  suitable  only  to  political 
action  is  applied  to  industrial  undertakings. 

73  : — The  case  of  the  Post  Office  Department  well  illustrates 
this  proposition.  /  Every  Postmaster  General  during  more 
than  a  generation  has  complained  with  more  or  less  bitterness 
of  the  defective  procedure  prevailing  in  that  Department,  and 
has  sought  with  more  or  less  earnestness  and  ability  to  effect 
a  reorganization.  In  1882,  the  Postmaster  General  in  his 
annual  report  strongly  represented  to  Congress  the  wasteful- 
ness arising  from  the  manner,  imposed  by  law,  of  making 
allowances  to  postmasters.  He  showed  that  the  distribution 
of  allowances  amounting  to  almost  $5,000,000  was  wholly 
within  the  discretion  of  a  fourth  class  clerk  in  the  office  of  the 
First  Assistant.  He  also  incidentally  pointed  out  that  the 
salaries  paid  to  a  large  class  of  these  postmasters  were  mere 

37 


sinecures  for  which  no  service  was  rendered  except  the  sign- 
ing of  official  papers.  Twenty-five  years  after  Postmaster 
General  Howe  had  shown  this  specific  evil,  the  same  conditions 
existed,  with  the  exception  that  the  fourth  class  clerk  in  ques- 
tion controlled  the  allotment  of  over  $25,000,000.  J 

74: — The  affairs  of  the  Post  Office  have  been  subjected 
within  recent  years  to  the  scrutiny  of  two  exceptionally  able 
Congressional  commissions,  which  have  scathingly  criticised 
the  methods  of  that  Department  and  recommended  extensive 
changes.  The  changes  have  not  been  made,  principally  be- 
cause political  and  not  economic  considerations  have  dominated 
the  administration  of  the  Post  Office  Department.  In  view  of 
the  failure  of  attempts  adequately  to  reform  the  methods  of 
the  most  important  of  Government  utilities,  it  may  fairly  be 
concluded  that  the  methods  which  have  hitherto  dominated  the 
Government  management  of  economic  affairs  will  continue 
to  dominate  them  in  the  future.  In  conclusion,  attention  is 
asked  to  the  situation  which  would  ensue  upon  the  application 
of  such  methods  to  the  Government  management  of  railroads. 

75 : — In  the  fiscal  year  ending  June  30,  1914,  the  combined 
expense  outlays  of  the  railroads  of  the  country  were  over 
$2,214,000,000.  The  investment  outlays  were  over  $637,- 
000,000, — the  latter  sum  probably  not  more  than  one-quarter 
of  the  annual  amount  reasonably  necessary  to  provide  trans- 
portation facilities  adequate  to  the  Nation's  needs. 

76: — In  the  event  of  Government  operation,  on  the  basis 
of  present  outlays,  the  expenditure  of  not  less  than  three 
billions  of  dollars  annually,  for  railroad  purposes  alone,  would 
be  controlled  and  directed  by  governmental  agencies.  It  is 
beyond  the  bounds  of  reasonable  probability  that  expendi- 
tures of  such  large  extent  can  be  so  apportioned,  through  the 

38 


agencies  necessary  under  a  democratic  form  of  government, 
as  properly  to  provide  for  all  the  infinite  needs  of  a  vast  and 
extraordinarily  complex  organization,  whose  ability  to  serve 
depends  upon  sufficient  and  continuous  financial  sustenance 
for  all  its  multitude  of  parts. 

77 : — It  is  certain  that  an  annual  railroad  budget  of  $3,000,- 
000,000  or  more  would  be  fiercely  assailed  both  in  and  out  of 
Congress.  It  is  certain  that  in  some  years  a  demand  for  econ- 
omy would  cause  it  to  be  ruthlessly  cut,  that  funds  absolutely 
necessary  for  even  moderate  efficiency  would  be  withheld,  and 
the  entire  organization  thereby  hopelessly  deranged. 

78 : — The  distribution  of  outlays  would  be  governed,  not  by 
economic,  but  by  political  expediency,  and  by  sectional  demands 
of  an  extent  and  force  far  exceeding  any  hitherto  known. 
The  competition  of  sections  for  public  buildings  and  for  river 
improvement  and  the  uneconomic  use  of  public  monies  result- 
ing therefrom,  huge  as  it  is,  would  be  trivial  compared  with 
the  competition  for  local  railroad  improvements.  That  not 
needed  would  often  be  done ;  that  urgently  needed  would  often 
not  be  done.  The  funds  spent  would  to  considerable  degree  be 
economically  wasted;  and  in  place  of  an  organism  with  all 
its  parts  properly  correllated,  and  therefore  capable  of  high 
efficiency  at  a  minimum  cost,  we  should  have  an  organism  so 
badly  correllated  and  so  defective  in  all  its  parts  that  its 
efficiency  would  be  very  low  and  the  cost  of  operation  exces- 
sive. 

79: — The  preceding  survey  of  the  field  thus  shows  in  the 
governmental  operation  of  public  utilities  defects  which  are 
insuperable  obstacles  to  economic  efficiency.  Those  defects  pro- 
ceed from  and  are  rooted  in  the  political  principles  upon  which 
our  form  of  Government  is  based.  The  American  people  be- 

39 


lieve  that  nothing  should  be  done  except  that  explicitly  author- 
ized by  the  representatives  of  the  people.  They  believe  that 
liberty  and  civil  rights  will  be  subverted  unless  public  officials 
be  frequently-  changed.  They  believe  that  the  powers  of  such 
officials  should  be  severely  limited,  that  their  discretion  should 
be  restricted  to  the  uttermost,  that  they  should  do  nothing  until 
the  Legislature  shall  have  given  its  assent  and  prescribed  the 
manner  of  doing. 

80: — But  the  methods  which  are  the  inescapable  result  of 
these  principles  are  repugnant  to  and  destructive  of  good  man- 
agement of  business  affairs.  The  methods  of  our  Govern- 
ment proceeding  as  they  do  from  political  principles  pro- 
foundly rooted  in  the  Nation's  convictions,  although  they 
may  be  somewhat  modified  cannot  be  essentially  changed. 
These  methods,  when  applied  to  the  field  of  economics  are 
deadly  blights.  To  subject  to  their  demoralizing  and  destruc- 
tive influence  such  vital  elements  of  the  National  industrial 
life  as  the  railroad,  telephone  and  telegraph  systems  of  the 
country,  would  almost  certainly  impair  to  an  extreme  degree 
the  usefulness  of  those  invaluable  public  instrumentalities,  and 
prove  an  immeasurable  misfortune. 


F.  B.  DEBERARD. 


Director  of  Research, 

Merchants'  Ass'n.  of  New  York. 


40 


Ill:    GOVERNMENT    REGULATION     OF 
TRANSPORTATION 


^-EFFICIENCY  OF  THE  VEHICLES  OF  TRANSPOR- 
TATION VITAL  TO  THE  NATION. 


P 


RESIDENT  WILSON  recently  wrote : 

"The  interest  of  the  producer,  the  shipper,  the 
merchant,  the  investor,  the  financier  and  the  whole 
public  in  the  proper  maintenance  and  complete 
efficiency  of  the  railways  is  too  manifest.  They 
are  indispensable  to  our  whole  economic  life,  and 
railway  securities  are  at  the  very  heart  of  most  in- 
vestments, large  and  small,  public  and  private,  by 
individuals  and  by  institutions." 

The  intent  of  public  regulation  is  to  secure  the  complete 
efficiency  which  President  Wilson  has  described,  to  protect 
the  public  against  abuse  and  to  assure  to  the  public  reasonable 
rates  of  charge  for  the  service  vital  to  it. 

The  need  of  such  regulation  is  unquestioned.  When  such 
regulation  by  public  authority  was  lacking,  the  railroads  were 
assumed  to  be  private  business  undertakings  in  the  manage- 
ment of  which  the  public  had  no  right  to  a  voice.  Their 
operation  was  marked  by  financial  exploitation,  excessive 
rates,  discrimination,  rebates,  favoritism,  and  insufficient  serv- 
ice. The  former  doctrine  of  private  control  has,  however, 
been  fully  exploded.  Railroads  are  now  unreservedly  con- 

41 


ceded  to  be  instrumentalities  of  the  public,  existing  by  virtue 
of  public  authority  and  therefore  subject  to  whatever  degree 
of  public  control  is  required  to  enable  or  compel  them  fully 
to  serve  the  public  needs  and  to  protect  the  public  rights. 

The  right  of  public  control  has  been  asserted  and  exten- 
sively exercised.  Under  such  control  the  characteristic  abuses 
of  the  past,  against  which  public  indignation  was  justly  di- 
rected have  been  in  large  part  abolished.  But  unfortunately 
much  of  the  legislation  hitherto  directed  against  railroads  has 
been  in  response  to  popular  demand  expressive  of  popular 
indignation.  It  has  been  in  the  nature  of  reprisals  for  past 
misdeeds  rather  than  in  the  nature  of  wise  remedies  for  econ- 
omic evils.  With  much  that  is  sound  and  useful  has  been 
combined  much  that  is  unsound  and  harmful.  The  power  of 
regulation  has  been  exercised  through  a  multiplicity  of  inde- 
pendent authorities,  operating  without  co-ordination,  with  dif- 
fering and  sometimes  opposing  methods.  By  reason  of  this 
unco-ordinated  and  multiple  regulation  through  independent 
bodies,  has  arisen  conditions  which  tend  seriously  to  impair 
the  power  of  the  railroads  to  render  efficient  service,  and 
which  therefore  tend  to  defeat  the  main  purpose  of  regula- 
tion. 


II:-WHERE  THE  POWER  OF  REGULATION  RESIDES. 

RAILROADS  are  now  subject  to  regulation  by  the  na- 
tional authority  and  by  each  state  in  which  their  lines 
are  located.    Hence  has  arisen  a  diversity  of  conflicting 
requirements. 

Besides  the  laws  of  Congress,  which  are  of  general  appli- 
cation, there  are  many  hundred  laws  passed  by  the  several 
states,  many  of  which  are  inconsistent  with  the  Federal  Laws 

42 


and  with  the  laws  of  other  states,  and  while  they  are  of  local 
application,  they  tend  in  large  degree  to  nullify  the  intent  of 
the  Federal  Laws  and  create  conditions  which  either  cannot 
be  uniformly  complied  with  or,  as  an  alternative,  involve 
extreme  and  wasteful  expense. 

This  conflict  arises  from  the  assumption  that  each  state 
may  rightfully,  within  its  own  borders,  regulate  commerce  and 
its  vehicles.  This  is  true  only  so  long  as  Congress  refrains 
from  asserting  and  exercising  whatever  superior  powers  of 
regulation  it  possesses. 

The  power  of  Congress  within  its  constitutional  limits,  is 
supreme  whenever  asserted  and  to  the  extent  of  its  assertion. 
When,  therefore,  Congress  undertakes  the  regulation  of  rail- 
roads as  carriers  of  interstate  commerce,  the  inferior  powers 
of  the  states,  in  so  far  as  they  impede  or  obstruct  the  national 
will  as  constitutionally  expressed  by  Congress,  must  yield. 

The  Constitution  provides  that — 

"The  Congress  shall  have  power: 

(3)   To   regulate  commerce  with   foreign  na- 
tions and  among  the  several  states." 

Congress  has  already  asserted  and  exercised,  in  part,  its 
power  of  regulating  interstate  commerce  and  has  construed 
it  to  comprehend  the  regulation  of  the  agencies  and  the  in- 
struments by  means  of  which  such  commerce  is  carried.  The 
entire  fabric  of  the  "Act  to  Regulate  Commerce"  is  based  upon 
this  interpretation.  It  assumes  that  whatever  is  a  necessary 
instrument  in  the  movement  of  commerce  between  the  states 
becomes,  from  that  fact,  subject  to  National  regulation. 

But  all  railroads,  whether  extending  through  two  or  more 
states,  or  solely  within  a  single  state,  are  necessary  instruments 

43 


of  interstate  commerce.  Even  in  the  case  of  strictly  intra- 
state  lines,  much,  and  often  most,  of  their  traffic  consists  of 
commodities  produced  in  and  shipped  by  consignors  in  other 
states,  to  local  consignees,  and  vice  versa. 

Moreover,  all  railroads  carry  local  commerce,  strictly  within 
the  limits  of  a  single  state.  Thus  every  railroad  has  a  dual 
capacity;  as  a  carrier  of  interstate  commerce,  which  function 
subjects  it  to  National  regulation;  and  as  a  carrier  of  intra- 
state  commerce,  which  subjects  it  to  State  regulation.  Thus, 
a  condition  of  dual  regulation  of  the  same  vehicle  results. 

From  an  economic  standpoint,  this  dual  regulation  is  detri- 
mental. Sole  regulation  by  National  authority  would  in  many 
respects  be  economically  beneficial.  But  whether  Congress 
has  power  under  the  Constitution  to  assume  sole  regulatory 
control  of  all  railroads,  on  the  ground  that  they  are  all  nec- 
essary vehicles  of  interstate  commerce,  and  that  State  regula- 
tion interferes  with  and  impairs  their  efficiency  as  such  inter- 
state vehicles,  presents  a  very  difficult  and  perplexing  consti- 
tutional question. 

This  argument  does  not  undertake  to  discuss  that  legal 
question,  but  confines  itself  to  showing  the  evil  economic  effects 
which  result  from  dual  or  multiple  regulation,  and  to  advo- 
cating sole  Federal  control  as  a  remedy.  If  Congress  has, 
under  the  existing  constitutional  provisions,  power  to  assume 
sole  regulation  of  all  railroads,  the  full  exercise  of  that  power 
would  be  highly  beneficial,  and  if  Congressional  power  is  now 
lacking  it  might  well  be  conferred  by  a  suitable  amendment 
to  the  Constitution. 


44 


HI:— INCONSISTENCIES  AND  HARMFUL  EFFECT   OF 
MULTIPLE  REGULATION. 

IT  is  self-evident  that  great  diversity  must  ensue  from  inde- 
pendent and  unco-ordinated  action  by  Congress  and  forty- 
eight  legislatures,  and  the  commissions  through  which 
their  mandates  are  given  effect.  It  is  equally  evident  that  when 
a  single  organism  is  subject  to  numerous  independent  authori- 
ties and  made  the  object  of  varied  and  conflicting  orders,  the 
proper  workings  of  that  organism  must  be  seriously  impaired 
and  its  functions  badly  performed.  A  condition  of  great  con- 
fusion and  low  efficiency  must  necessarily  result. 

There  can  be  no  reasonable  doubt  that  Congress  was  given 
power  to  regulate  commerce  between  the  states  in  order  that  no 
state  should  for  its  own  benefit  obstruct  or  impede  the  com- 
merce of  other  states. 

But  the  regulatory  powers  over  railroads  now  exercised  by 
the  various  states  produce  such  obstruction.  It  is  not  possible 
for  any  state  to  undertake  the  regulation,  within  its  borders, 
of  any  railroad  (except  as  to  limited  police  matters),  without 
producing  effects  reaching  far  beyond  the  borders  of  the  state 
and  affecting  the  movement  of  commerce,  not  only  within  the 
state  but  in  far  distant  parts  of  the  country. 

This  condition  already  exists  because  of  the  regulative  laws 
of  several  of  the  southwestern  states.  It  is  clearly  the  intent 
of  the  Constitution  that  there  shall  be  a  free  and  unimpeded 
movement  of  commodities  throughout  the  boundaries  of  the 
nation.  This  movement  is  precluded  by  the  laws  of  Texas, 
Alabama,  Arkansas,  Mississippi  and  other  states.  In  some  of 
these  states  freight  charges  have  been  fixed,  either  by  legis- 
latures or  commissions,  with  a  view  to  excluding,  by  means 
of  discriminatory  local  rates,  the  products  of  other  states,  in 
order  that,  by  reason  of  an  advantage  in  freight  rates  thus 

45 


secured,  local  merchants  should  be  relieved  from  the  compe- 
tition of  those  located  without  the  state. 

In  these  cases  rates  applying  to  local  traffic  have  been  fixed 
by  law  so  low  as  just  to  escape  confiscation,  in  order  that 
commodities  moving  solely  within  the  state  shall  be  subjected 
to  a  materially  lesser  freight  burden  than  is  borne  by  com- 
modities coming  from  without  the  state.  So  we  have  a  condi- 
tion expressly  designed  to  obstruct  the  free  movement  of  com- 
modities— a  condition  under  which,  by  state  authority,  bar- 
riers against  such  free  movement  are  raised. 

In  numerous  states  large  wasteful  expenditures  are  enforced 
by  law.  The  train-crew  laws,  adopted  by  twenty,  but  rejected 
by  twenty-one  states,  afford  an  example.  The  purpose  of 
these  laws  is  solely  the  enforced  employment  of  more  men. 
They  serve  no  useful  purpose  whatever,  but  impose  upon  the 
railroads  a  heavy  burden  of  wasteful  expense,  and  divert  the 
outlays  from  useful  channels  in  which  they  would  benefit  the 
public.  In  1914  the  "full  train-crew"  laws  cost  the  Pennsyl- 
vania Railroad  $850,000.  The  aggregate  expense  imposed  by 
these  laws  upon  166  railroads  was  over  $4,050,000,  equal  to  a 
5  per  cent,  charge  upon  $80,000,000. 

Reduction  in  the  length  of  freight  trains  is  now  strongly 
urged  in  many  states,  although  not  yet  adopted  by  any.  Such 
reduction  would  not  only  greatly  increase  operating  costs,  but 
would  nullify  the  utility  of  huge  investments  hitherto  made 
for  the  express  purpose  of  promoting  the  handling  of  large 
trains — the  most  importarft  factor  in  railroad  operating  econ- 
omy and  in  its  influence  upon  low  freight  rates. 

Fourteen  states  have  dissimilar  safety  appliance  laws.  Fif- 
teen states  require  a  minimum  daily  movement  for  freight 
cars  in  transit,  regardless  of  the  almost  insuperable  difficulties 
imposed  by  conditions  which  can  only  be  removed  by  large 
investments  of  new  capital.  Some  of  these  states  require  a 

46 


minimum  movement  of  50  miles  per  day — about  twice  the 
average  for  the  whole  country,  In  some  cases  it  is  sought  to 
favor  local  traffic  by  imposing  excessive  penalties,  one  state 
fixing  a  penalty  for  delay  of  $10  per  hour.  Twenty-eight 
states  have  non-uniform  head-light  requirements. 

Various  states  impose  penalties  for  failure  to  provide  freight 
cars  upon  demand.  The  penalty  in  Indiana  is  $i  per  day;  in 
North  Dakota  $2;  in  Kansas  and  North  Carolina  $5.  The 
effect  of  the  variance  in  penalties  is  that  the  state  where  the 
largest  penalty  prevails  gets  the  cars,  while  its  neighboring 
states  are  discriminated  against,  and  their  car  shortage  made 
more  acute. 

By  reason  of  the  multiplication  of  regulatory  bodies,  the 
railroads  of  the  country  are  now  required  annually  to  make 
over  two  million  reports  of  various  kinds.  The  form  of  these 
reports  varies  by  reason  of  differing  requirements  of  the  sev- 
eral states.  The  expense  of  compliance  is  enormous.  The  cost 
of  the  separate  investigations  ordered  by  the  different  states 
is  also  very  great.  Numerous  other  local  requirements  involv- 
ing large  cost  are  in  effect. 

The  aggregate  wasteful  expense  is  very  great  and  it  might 
be  in  large  degree  avoided  were  it  not  for  the  separate  opera- 
tion of  state  legislatures  and  commissions.  In  consequence 
of  such  legislation  regulating  operation,  116  companies  ex- 
pended upwards  of  $28,700,000  in  1914,  little  of  which  was 
for  beneficial  purposes.  This  sum,  if  saved,  would  have  paid 
the  interest  upon  $574,000,000  which  could  have  been  devoted 
by  the  companies  to  improvements  sorely  needed  to  increase 
their  efficiency. 

The  effect,  of  discriminatory  local  rates,  and  of  wasteful 
outlays  imposed  by  local  laws  is  not  local.  In  such  cases  the 
proper  revenues,  necessary  to  the  efficiency  of  the  railroad  as 
a  whole,  are  depleted,  thereby  either  depriving  the  residents 

47 


of  other  States  of  the  degree  of  service  to  which  they  are 
entitled,  or,  as  an  alternative,  compelling  them  to  bear  an 
undue  share  of  the  cost  of  properly  maintaining  and  operat- 
ing the  road. 

It  is  obvious,  therefore,  that  the  present  machinery  of  reg- 
ulation is  seriously  defective  in  that  it  produces  conditions  of 
great  disparity  between  different  sections  of  the  country,  cre- 
ates barriers  against  the  free  movement  of  commerce  instead 
of  promoting  such  movement,  and  decreases  the  efficiency  of 
railroads  as  a  whole. 

State  regulation,  by  hampering  the  instruments  of  com- 
merce, has  potentiality  to  nullify  the  intent  of  the  Constitu- 
tion that  commerce  between  the  states  should  be  untrammeled 
by  state  action.  It  prevents  effective  and  consistent  operation  of 
railroads  and  thereby  seriously  impairs  their  efficiency.  Rail- 
roads are  the  highways  of  the  nation,  and  as  such,  they  should 
not  be  restricted  in  their  effectiveness,  impeded  or  obstructed 
by  local  authorities.  The  national  welfare  requires  that  rail- 
road regulation  be  based  upon  national,  and  not  local,  con- 
siderations; that  it  be  coherent  and  consistent;  that  it  be  not 
punitive  of  past  misdeeds;  and  that  it  be  uniformly  directed 
throughout  the  bounds  of  the  nation,  to  promoting  the  efficient 
service  which  is  the  people's  right  and  which  can  only  be  pro- 
vided by  unification  of  regulation  and  by  conservation  of 
railroad  resources. 


IV:— EFFECT    OF     MULTIPLE    REGULATION     UPON 
RAILROAD  CREDIT. 

THE  credit  of  railroads  at  the  present  time  is  in  a  very 
depressed  condition.     During  several  years  past,  the 
investment,   without   security,   of   capital   in   railroad 
undertakings  has  steadily  declined  until  at  present  it  has  almost 

48 


ceased.  The  public  has  reached  the  point  where  it  is  distrust- 
ful of  the  safety  of  investments  in  the  stocks  of  railroad  com- 
panies. Hence  the  latter  are  now  forced  to  rely  almost  wholly 
for  their  financing  upon  the  proceeds  of  bond  issues;  that  is 
to  say,  upon  loans  secured  by  mortgage  upon  existing  proper- 
ties. It  is  obvious  that  this  source  of  new  capital  cannot  much 
longer  be  depended  upon,  for  the  reason  that  the  security 
available  for  new  bond  issues  will  be  subordinated  to  exist- 
ing loans,  and  therefore  eventually  cease  to  be  safe. 

The  reports  of  the  Interstate  Commerce  Commission  show, 
during  a  long  series  of  years  a  gradual  and  practically  constant 
decline  in  the  net  earnings  of  railroads.  The  Commission,  in 
its  decision  of  the  recent  "Five  Per  Cent.  Advance"  case  de- 
clared that  the  net  operating  income  of  the  railroads  "is 
smaller  than  is  demanded  in  the  interest  of  both  the  general 
public  and  the  railroads  *  *  *.  Their  net  operating  income 
is  insufficient  and  should  be  increased." 

During  the  eight  years  from  June  30,  1907  to  June  30, 
1915,  the  railroads  expended  an  annual  average  of  $600,- 
000,000  for  improvements  and  enlarged  facilities.  This  new 
capital  added  nothing  to  the  net  revenues.  On  the  contrary, 
despite  a  continuous  and  large  increase  in  tonnage  and  traffic 
mileage,  the  net  revenues  in  1915  were  some  $21,000,000  less 
than  in  1907.  That  is  to  say,  the  recent  capital  investments 
in  railroads,  which  are  approximately  25  per  cent,  of  the 
entire  amount,  are  not  self-sustaining,  but  impose  an  additional 
charge  upon  the  earnings  of  previous  investments. 

The  unwillingness  of  investors  to  place  their  money  in  rail- 
road enterprises  without  security  (that  is,  to  purchase  new 
issues  of  railroad  stocks)  is  due  mainly  to  the  gradual  but 
almost  constant  decline  in  net  earnings  which,  in  turn,  is  due 
to  two  causes : 


49 


(a)  Reduction  of  rates  imposed  piecemeal  through  the 
operations  of  the  Interstate  Commerce  Com- 
mission and  the  independent  commissions  and 
legislatures  of  practically  all  the  states.  The 
aggregate  result  of  rate  reduction  through  these 
several  channels  is  very  great. 

(6)  A  heavy  increase  in  operating  costs  arising  not 
only  from  the  general  increase  in  the  cost  of 
materials  and  labor,  but  also  from  state  laws 
which  make  mandatory  large  expenditures 
for  numerous  diverse  purposes,  all  of  which  are 
economically  unproductive  and  some  of  which 
are  wholly  wasteful.  The  ultimate  effect  of  all 
these  laws  is  to  add  greatly  to  the  cost  of  opera- 
tion and  in  some  respects  to  impair  rather 
than  to  increase  efficiency. 

The  constant  trend,  therefore,  of  regulation  has  been  in  the 
direction  of  impairment  of  railroad  net  revenues,  until  their 
managers  can  no  longer  obtain  from  the  public  the  funds  requi- 
site properly  to  provide  for  the  growing  needs  of  the  country's 
commerce.  The  result  is  already  strongly  evident  in  the 
present  marked  deficiency  of  railroad  facilities,  which  must 
inevitably  continue  and  increase  until  regulation  is  directed 
toward  placing  and  keeping  the  railroads  upon  a  sound  eco- 
nomic basis.  That  can  be  effected  only  by  lifting  the  burden 
of  wasteful  outlay  now  imposed  by  state  regulation,  and  by 
adjusting  rates  with  reference  to  the  cost  of  service  instead  of 
with  reference  to  popular  demand. 


^-TRANSPORTATION  NEEDS  OF  THE  PUBLIC. 

THE  railroads  of  the  country,  as  a  whole,  are  at  the 
present  time  materially  below  suitable  standards  of 
efficiency.  The  impairment  of  their  credit  during  re- 
cent years  has  been  such  that  they  have  been  unable  to  com- 
mand the  capital  needed  for  the  betterments  necessary  for 
properly  moving  the  country's  commerce.  The  result  of  in- 
sufficient capital  outlays  has  been  strikingly  shown  by  the 
recent  and  still  existing  congestion  in  traffic  movement,  as- 
sumed to  be  due,  in  large  degree,  to  the  abnormal  movement  of 
commodities  incident  to  the  war  in  Europe,  but  due,  in  addi- 
tion, to  the  inability  of  existing  facilities  to  handle  promptly 
the  normal  traffic  movement  of  the  country  when  at  its  seasonal 
maximum. 

Congestion  of  traffic  has  been  a  regular  occurrence  during 
crop  moving  seasons  for  several  years  past,  and  in  case  of 
unusual  business  activity  the  movement  of  traffic  is  immedi- 
ately impeded.  The  fact  is  that  the  investments  of  the  rail- 
roads in  the  betterments  needed  for  prompt  traffic  movement 
have  been  proportionately  much  less  than  the  increase  in  the 
volume  of  traffic  required  to  be  moved.  There  has  been  es- 
pecial deficiency  in  the  matter  of  provision  of  adequate  ter- 
minals. Speaking  broadly  and  with  a  few  exceptions,  the 
terminal  facilities  of  the  railroads  of  this  country  are  com- 
pletely outgrown.  They  were  planned  in  a  haphazard  way  in 
earlier  days  when  the  requisites  for  terminals  were  not  fully 
appreciated,  and  when  the  importance  of  providing  for  future 
growth  was  not  obvious.  In  consequence,  there  is  scarcely 
an  existing  railroad  which  has  terminals  of  such  design  and 
of  such  extent  as  are  indispensable  to  the  rapid  handling  of 
the  freight  service.  To  provide  such  suitable  terminals  im- 
plies the  purchase  in  every  city  of  large  tracts  of  exceedingly 


valuable  real  estate,  the  practical  reconstruction  of  existing 
trackage  and  the  adoption  of  modernized  plans  which  will  per- 
mit the  rapid  despatch  and  unloading  of  freight  trains.  It  is 
commonly  assumed  that  the  slow  movement  of  freight  is 
mainly  due  to  the  lack  of  cars.  This  is  only  partly  true.  The 
main  impediment  is  the  lack  of  adequate  terminals  without 
which  quick  movement  is  impossible,  and  which  lack  in  itself 
makes  necessary  a  much  larger  equipment  of  rolling  stock 
than  would  otherwise  be  required.  The  insufficiency  of  these 
pressingly  needed  facilities,  the  absence  of  which  inflicts  severe 
harm  upon  the  business  community,  is  due  primarily  to  the 
declining  credit  of  the  railroads,  by  reason  of  which  they  can- 
not command  the  capital  necessary  to  reasonable  efficiency  in 
this  respect. 

It  has  already  been  pointed  out  that  this  condition  of  in- 
sufficient credit,  and  therefore  of  insufficient  facilities,  is 
largely  due  to  the  increased  cost  of  operation  and  reduced 
revenues  resulting,  to  a  considerable  degree,  from  the  man- 
dates of  forty-eight  legislatures  or  commissions  operating  in- 
dependently. The  remedy  for  it  is  the  substitution  for  the 
present  numerous  diverse  regulatory  bodies,  whose  viewpoint 
is  purely  local,  of  a  national  tribunal  whose  breadth  and  ability 
shall  qualify  it  to  devise  such  methods  of  regulation  as  shall 
conserve  the  efficiency  of  the  railroads  instead  of  impairing 
it;  and  which  shall  in  all  things  determine  its  action  upon  the 
broad  considerations  of  national  welfare  rather  than  upon  the 
narrow  considerations  of  local  benefits. 

VI:-REGULATION  OF  ISSUANCE  OF  SECURITIES. 

IT  is  doubtless  desirable  and  often  necessary  that  railroads 
should  not  possess  the  power  to  issue  securities  until  the 
purpose  to  which  the  funds  are  to  be  applied  are  shown  to 
be  necessary  and  proper  purposes.    Flagrant  abuses  were  com- 

52 


mon  in  the  past  by  reason  of  unrestricted  power  in  this  respect, 
and  to  this  cause  is  traceable  much  of  the  over-stringent  legis- 
lation that  now  exists. 

It  is  wise  and  reasonable  that  the  public  should  be  assured 
through  its  proper  agents  that  the  funds  derived  from  the 
sale  of  bonds  and  stocks  are  properly  necessary  for  the  effi- 
cient conduct  of  the  railroads,  and  that  they  are  applied  to 
the  purposes  for  which  they  were  issued;  but  it  is  wholly 
unnecessary  in  the  public  interest  that  this  process  of  scrutiny 
be  indefinitely  extended  and  that  it  be  exercised  by  several 
states  with  reference  to  the  same  issue  of  securities;  that  di- 
verse regulations  affecting  such  issue  be  prescribed  by  the 
different  states;  and  that  the  refusal  of  one  state  to  approve 
should  be  permitted  to  nullify  the  approval  of  other  states, 
and  thereby  prevent  the  railroad  from  obtaining  the  funds  gen- 
uinely necessary  to  its  proper  purpose. 

Such  a  condition,  however,  exists,  and  it  is  further  aggra- 
vated by  the  requirement  which  exists  in  some  states  that 
at  least  a  portion  of  the  funds  obtained  from  any  issue  of 
stocks  and  bonds  shall  be  expended  within  the  state,  irrespec- 
tive of  the  locality  where  the  application  should  properly  be 
made. 

Other  states  see  in  the  power  over  issuance  of  securities  an 
opportunity  for  exacting  from  railroads  a  heavy  tax  as  a  con- 
dition upon  which  the  funds  may  be  obtained.  The  New  York 
Central  Railroad,  having  but  a  few  miles  of  line  within  the 
limits  of  the  State  of  Illinois,  was  recently  compelled  to  pay 
to  that  state  $600,000  for  the  privilege  of  issuing  bonds  to  pro- 
vide funds  for  betterments  located  wholly  within  other  states. 
It  need  scarcely  be  said  that  this  is  an  abuse  of  the  taxing 
power  detrimental  to  the  public  of  the  entire  country,  by  reason 
of  the  effect  of  needless  and  wasteful  outlays  upon  the  gen- 
eral efficiency  of  the  property  so  burdened. 

53 


In  respect  of  control  of  securities,  adequate  investigation 
by  a  single  well-qualified  commission  will  suffice  to  protect 
every  public  interest  and  will  promote  the  welfare  of  both  the 
public  and  the  railroads. 

V1I:-CENTRAL1ZED  REGULATION  DESIRABLE* 

MORE  than  80  per  cent,  of  the  nation's  rail  traffic  is 
interstate,  and  therefore  of  National  concern.  The 
railroads  by  means  of  which  this  traffic  is  carried 
are  the  highways  of  commerce.  Their  high  efficiency  is  of 
immeasurable  National  importance.  It  is  vital  to  the  general 
welfare  that  their  efficiency  be  promoted  and  expanded;  that 
whatever  regulation  be  applied  to  them  have  in  view  the  wel- 
fare of  the  Nation  as  a  whole;  that  it  be  just,  consistent  and 
economically  helpful. 

But  nevertheless,  by  the  absence  of  single  centralized  con- 
trol, the  regulation  of  the  Nation's  highways  has  fallen  into 
the  control  of  local  authorities;  and  those  National  highways 
are  regulated  for  local  benefit  as  though  they  were  local  affairs. 
Hence  has  arisen  a  body  of  unrelated,  inconsistent  and  ob- 
structive local  regulation,  disregardful  of  the  National  char- 
acter of  the  railroads,  and  which  seriously  impairs  their  power 
properly  to  perform  their  National  function. 

The  present  chaotic  condition  is  exceedingly  detrimental. 
Single  regulation  by  National  authority  would  abolish  the 
evils  arising  from  multiple  control  The  business  sentiment 
of  the  country  is  generally  favorable  to  the  abolition  of  di- 
verse state  regulation  and  the  substitution  of  national  au- 
thority. Intelligent  business  men  do  not  wish  regulation  of 
railroads  to  take  the  form  of  reprisals  for  past  wrongs,  con- 
cessions to  passing  popular  prejudice  nor  financial  discrimina- 
tions against  part  of  the  country  for  the  benefit  of  other  parts. 

54 


They  wish  rates  as  low  as  reasonably  possible,  but  they  clearly 
understand  that  efficiency  of  service  is  more  important  than 
low  rates,  and  they  do  not  wish  the  railroads  starved  and  thus 
incapacitated  from  giving  good  service. 

The  principles  of  business  efficiency  are  already  applied  in 
a  remarkable  degree  to  the  management  of  railroads.  The 
abuses  against  which  the  public  rebelled  years  ago  are  prac- 
tically eliminated.  The  necessity  for  punitive  legislation  has 
practically  passed  away.  The  present  need,  therefore,  is  for 
regulation  which  shall  carefully  eliminate  sectional  and  politi- 
cal-motives; which  shall  proceed  along  judicial  lines;  -'hich 
shall  be  determined  solely  upon  sound  economic  grounds";  and 
which  shall  give  full  regard  to  the  need  for  conserving  the  in- 
strumentalities of  commerce  as  a  necessary  means  for  pro- 
moting the  welfare  of  the  whole  people. 

Adequate  increase  of  the  number  of  members  and  the  powers 
of  the  Interstate  Commerce  Commission  and  the  taking  over  by 
the  Federal  government  of  the  sole  control  of  regulation  of 
railroads  would  be  a  wise  and  beneficial  measure  and  tend 
greatly  to  improve  the  railroad  system  of  the  entire  country. 


F.   B.   DEBERARD. 


Director  of  Research, 

The  Merchants'  Ass'n.  of  New  York. 


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